Emotions running high before today’s Fed rate decision – Daily Market Brief, June 15, 2022

European stocks are heading for a positive start to trading after more losses were booked on Tuesday and as investors look ahead to the Federal Reserve interest rate decision.

·         Chinese industrial production & retail sales beat forecasts

·         The market is almost certain that the Federal Reserve will raise rates by 75 basis points

·         A 50 bp point could see the USD fall in disappointment and stocks, gold rise

European and US bourses finished broadly lower on Tuesday, in another volatile session ahead of the FOMC rate decision. The FTSE again fared slightly better than its European peers, owing to the tumbling pound. Sterling fell to a 2-year low versus both the USD and the EUR, bringing a beneficial exchange rate to the many multinationals on the British index.

GBP/USD trades around 1.20 after yesterday’s data revealed that unemployment in the UK rose and wages adjusted for inflation fell to the lowest level on record, highlighting the cost of living crisis engulfing Britain.

China data

Encouraging data from China overnight is helping to lift the mood heading towards the European open. China’s industrial production rebounded in May to 0.7% YoY, up from -2.9% in April and ahead of the -0.7% forecast. The data suggests that Chinese factories were not impacted by COVID as much as previously feared.

Meanwhile, retail sales were better than expected at -6.7% MoM in May, up from -11.1% in April and ahead of the -7.1% forecast. While sales are moving in the right direction, they highlight how lockdowns hammered consumer demand.

The European session is relatively light on the data front, with just eurozone industrial production of note. Today there is only one show in town – the Fed rate decision.

Fed rate decision

The Fed is expected to go big. According to the CME Fed watch tool, the market is pricing in a 98.1% probability of a 75 basis point rate hike today, up from 8% this time last week. Should the Fed vote for a 75 bp hike, the first since 1994, this would be both technically and psychologically a colossal move. It would send a strong signal the Fed is willing to combat inflation while raising the prospect of a recession in the US considerably. 

With consumer prices remaining stubbornly high at a 4-decade high, PPI at 10.8%, and oil prices around a 3-month high, inflation looks likely to remain a problem for both the Fed and Biden for some time yet. The question is, does the Fed consider the inflation risk to be sufficiently large to send the US economy into a deep recession?

Even if the Fed hikes by 50 basis points rather than 75, Jerome Powell could use the press conference to lay the groundwork for a 75 bp hike next month, hoping to create a slightly more orderly move.

In addition to the rate decision, economic projections will be watched carefully, with a rise in CPI and a fall in GDP expected. The Dot Plot is also expected to rise to EOY 2.5%, up from 1.9%.

Higher rates tend to be bad for equities but there is scope for relief that the Fed is stepping up to the plate, albeit late.

Should the Fed hike by 50 instead of 75 bp, the USD could ease lower in disappointment, and stocks and gold could rise. However, with aggressive moves expected across the coming months, the initial market reaction could be short-lived.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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