Fed signals just one cut for 2024

The Federal Reserve kept policy unchanged at the June FOMC meeting, holding the Fed Funds rate at 5.5% on the upper bound. The only notable change to its statement being that there was “modest further progress” toward hitting the Fed’s inflation target, compared with a “lack of further progress” that they signalled at the May FOMC.

The Fed also released a new summary of economic projections with the forecast for GDP growth in 2024 unchanged at 2.1% along with the unemployment rate at 4%, unchanged from their March projections. The Fed did revise higher their expectation for PCE inflation to 2.6% this year and to 2.3% in 2025. According to the new SEP, PCE inflation will only hit the Fed’s target level by 2026.

The dots plot was also revised with the median forecast among Fed officials now for just one cut, compared with three in March. However, four policymakers opted for no rate cuts this year, up from two in March, while seven suggested that just one cut would be appropriate and eight penciled in two cuts. For 2025, the median projection for the Fed funds rate was revised higher to 4.125%, up from 3.875% in March.

In his press conference following the decision Fed chair Jerome Powell said that the “most recent inflation readings have been more favourable” but that they still “need to see more good data to bolster our confidence” that inflation is heading toward target levels. He also noted that the labour market looked as though it had returned to conditions it had ahead of the Covid-19 pandemic and was in “better balance.” He also tried to temper some of the hawkishness in the dots plot by noting that while the median projection for rate cuts has dropped this year, the additional rate cuts have “just moved later” into 2025.

Ahead of the FOMC decision, US CPI for May came in cooler than expected with price growth of 3.3% y/y, slightly slower than 3.4% estimated for April. On a monthly basis, prices were unchanged for the first time since July 2022. Core inflation was also slower than anticipated at 3.4% in May compared with 3.6% a month earlier. Super core inflation also slowed in May to 4.8%, down from 4.9%. The moderation in inflation was relatively mild but provided some comfort to markets after several hotter than expected prints so far this year. In terms of contribution to inflation, energy helped to flatten the monthly print with prices falling last month. Core services was still the main contributor to inflation with shelter and medical services adding the most.

The overall message from the Fed was to maintain a hawkish eye over the economy while noting the progress that is being made on inflation. While the median for rate cuts was revised lower, to just one cut, the possibility of two rate cuts still remains live, particularly if inflation data follows a similar path to the April-May prints.

Inflation in India slowed more than expected in May to 4.75%, down from 4.8% a month earlier. Core inflation is the primary driver of easing inflation in the economy and it ticked down to 3.1% in May from 3.3% a month earlier. Food inflation, by contrast, remains elevated at 8.7%. Energy costs continued to decline, with fuel and electricity down 3.8% y/y, slightly slower than the 4% recorded in April.

The EU has announced it will impose tariffs on imports of Chinese electric vehicles beginning in July at rates from 17.4% to 38.1%. The trade action stems from an EU investigation into Chinese state support for electric vehicle manufacturers that are competing with European-made cars. China has indicated it may response with similar tariffs on imports of European-made cars. The EU action follows on from US tariffs of 100% on Chinese EVs and other goods announced in May.

Industrial production in the UK fell far short of market expectations in April, dropping by 0.9% m/m compared with market estimates of a decline of just 0.1%. There were sharp declines in the production of medicines, electrical equipment as well as food and beverages. In a separate report, the ONS estimated the UK economy was unchanged in April as a modest gain in services (0.2% m/m) offset declines in industry and construction.

Today’s Economic Data and Events

• 16:30 US initial jobless claims June 8: forecast 225k
• 16:30 US PPI m/m May: forecast 0.1%

Fixed Income

• US Treasury markets oscillated between highs prompted by the cooler than expected inflation print and lows sparked by the Fed’s apparently hawkish stance on where policy will go from here. Yields on the 2yr UST dropped as much as 17bps at one point before closing the day at 4.7518%, down 8bps. The moves were similar in the 10yr, with an initial drop in yields of 16bps in response to the inflation print moderating later in the day and ultimately closing down 9bps at 4.316%.
• Markets are pricing in less than two cuts from the Fed by the end of the year with September getting about a 60% probability and November or December looking like more of a certainty. The message from Chair Powell seemed to be that the Fed was not interested in calendar dates when looking at when it would be appropriate to cut rates, but rather the data trend that may spread into 2025.
• Bond markets across Europe closed positively overnight, tracking US Treasuries higher. Yields on German 10yr bonds fell 9bps while French 10yr bond yields also fell about 9bps. In the UK, gilt yields came off by 14bps.

FX

• Currency markets seemed to hold their post-inflation data moves better than bond markets with the dollar coming under selling pressure for the first time this week. EURUSD rose by 0.6% to 1.0809 while GBPUSD gained almost 0.5% to 1.2798. USDJPY also moved in favour the yen, down 156.72.
• Commodity currencies also rallied with USDCAD extending its move lower for a third day. The Loonie rallied 0.3% to settle at 1.4723. AUDUSD added almost 0.9% to 0.6664 while NZDUSD rose by 0.7% to 0.6186.

Equities

• Equity markets responded positively to the US inflation data but moderated their gains somewhat following the Fed statement. The S&P 500 added 0.9% overnight while the NASDAQ gained a strong 1.5%. However, the Dow Jones closed with a downward bias.
• European markets had a positive close with the Euro Stoxx 50 up 1.4% while the FTSE added 0.8%. Asian markets have opened tentatively in the green in early trade today.
• Local markets were negative overnight. The DFM fell 0.7% while the ADX closed lower by 0.5%. The Tadawul also saw a steep drop of 1% overnight.

Commodities

• Oil prices managed gains of about 0.8% overnight with Brent settling at USD 82.60/b and WTI at USD 78.50/b. Both are fading those moves in early trade today. The EIA reported a stock build of 3.7m bbl in crude stocks last week along with builds in gasoline and distillate inventories. US oil production was 100k b/d higher at 13.2m b/d while there was a strong rise in commercial crude imports, up 1.2m b/d, while product supplied fell by almost 1.3m b/d.
• The IEA left its oil demand forecast for 2024 largely intact, with demand growth for this year nudged down by 100k b/d to 0.96m b/d. There was a more pronounced cut to their 2025 demand growth forecast where the IEA cut the outlook by 150k b/d to slightly more than 1m b/d. Demand in OECD economies will contract in both years, leaving emerging economies to make up all the growth in oil consumption.
• Alongside their monthly oil market report, the IEA released their long-term projections for oil markets where they expect to see global oil demand peaking and hitting a plateau by 2030. The IEA also noted a strong rise in production from non-OPEC+ countries that will overwhelm demand.