Our Views
Going into this week, we believed that the market was set to rally in the week after the FOMC meeting, and what happened on Wednesday did not change our view. Everything went as expected, or maybe a little bit better. A few statements stood out to me:
- Powell stated explicitly that they’re going to stop raising rates before we get to 2% inflation. That’s key: Some FOMC members have talked about wanting to stay tight until they see 2%, but in our view, the reality is that the Fed is going to slow once inflation is on a glide path lower.
- Fed staffers are no longer forecasting a recession. That had emboldened a lot of people in the hard landing camp, but that’s no longer the view of Fed economists.
- Finally, perhaps most importantly, Powell said that June CPI was “better than expected for a change.” And he also said that if we saw several more reports like this, the Fed will need to rethink the direction and path to monetary policy.
And that’s exactly our view.
- US Equity markets showed roller-coaster type volatility following the Fed’s rate hike to new 22-year highs. However, the lack of selling pressure should not be seen as a signal that trends have a greater-than-average probability of continuing to extend in the weeks to come.
- It’s worth pointing out the strength in Financials following Powell’s assertion that the Banking system remains “sound and resilient.”
- To me, Powell’s language sent a clear message that June’s pause should not be interpreted as the end of the cycle or the start of a “one-month on, one-month off” type policy.
- Chair Powell was clear that the June CPI was positive, but he also said that we need to see more like that. There will be two CPI numbers before the September meeting so the door is clearly open to lower CPI for two months, and I think that would likely lead to a September pause.
- I thought it was noteworthy that while he communicated that cuts are not likely to start this year, he clearly opened the door for cuts next year.
- I also noticed his comment that a halt, and indeed a cut in rates, could occur before the inflation rate hits 2%.
Was July the Last Hike of This Rate Cycle?
The FOMC was at top of mind for investors this week, with a hike on July 26 viewed (accurately, as it turns out) as a virtual certainty. On Monday, the CME’s FedWatch tool put the probability of a 25bp hike (to 5.25%-5.50%) at 98.6%.
Fundstrat Head of Research Tom Lee agreed with this view going into Wednesday, but he was more interested in the post-meeting press conference and what it meant for the Fed’s path going forward. “It is the qualitative views around the Fed’s sense of progress on the inflation war that matters.”
At the traditional post-meeting press conference, Fed Chair Jerome Powell understatedly acknowledged that “the June CPI report actually came in a bit better than expectations,” but suggested that the Fed needed to see more data points like that before responding definitively.
That’s something Lee believes will happen. After soft readings for both June CPI and PCE, he predicted that the readings in July and August would be similarly soft as well. Since these will come out before the next FOMC meeting, this further supports Lee’s view that this Wednesday’s hike might well be the last one of this rate cycle. Right now, “2023 Core PCE is tracking below the Fed summary projections,” he pointed out.
As Tom Block, our Washington Policy Strategist, noted, “There will be a great deal of economic data for the policy makers to consider between meetings.”
From a technical perspective, Head of Technical Strategy Mark Newton was paying close attention to the USD and Treasury yields ahead of the meeting. “My take is that the US Dollar, along with US Treasury yields should soon begin to roll back over, and this should happen by the end of July,” he said. “Wednesday’s about-face might prove the start of this move,” he observed, though he conceded that marks from European Central Bank President Lagarde on Thursday might have briefly postponed that move. In Newton’s view, Lagarde “was far more dovish” from what she had said last month, at least conceding the possibility of not hiking in September.
Block summed up Powell’s remarks thusly: “Powell kept everything on the table for future policy, specifically noting that they could raise or hold steady in September.”
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