Inflation ripping higher… 0.75% or 1% hike on deck?
The May - June US Economic data indicates:
- The US Jobs market remains strong.
- Inflation remains high.
- Supply chain disruption remains because of COVID related lockdowns mainly in China & Russian invasion of Ukraine all add to higher inflation pressure (commodity shock).
A more unpredictable rate outlook
What we know according to the previous June FOMC policy / press statements:
- FED Chairman Powell said that a “soft economic landing” has become difficult.
- If inflation does not come under control then price stability across consumer prices will become harder to manage.
- If economic data starts to point towards a faster slowdown then the case for a predictable interest rate outlook becomes even more difficult for the markets to price in.
- Going into 2022 / 2023 the rate path points higher, however if the economy slows down at a more aggressive pace than what the FED is planning for, then the case for rate cuts as we move towards 2024 can’t be ruled out.
FED Funds Rate possibilities
Based on the prospect of general inflation estimates and GDP growth forecast consensus projections.
Source: J. Knobel consensus findings based on public data
What are the expectations for the July FOMC rate decision?
- Prices of goods and services have moved higher month-on-month. Cost for shelter was reported to have increased in May, even though the consensus has been calling for the cost of shelter to start slowing down; this so far as of May has not been the case.
- Medical services prices continue to push higher.
- Apparel prices are also higher on the back of higher commodities prices.
Source: Trading Economics / Tradingview
Higher than 0.75% rate hike cannot be ruled out
During the previous FOMC monetary policy meeting, the FOMC seemed rather open to a larger than 0.75% hike in July.
EUR/USD testing parity?
In the background, FX land is revolving around the macroeconomic effects of a stronger US dollar.
The US FED has hiked +1.5% and is forecasted to hike more; Bank of England already has hiked +1.15%, and with Europe getting just as much inflation as the US, UK, Australia and Canada etc., ECB rates have remained deep in the negative until ECB’s recent surprise with July’s +0.5% rate hike. Even with the ECB’s move, EURO rates remain even further behind the inflation curve.
The wider spreads between the US FED and the ECB are very clear in the EUR/USD price action as seen in the daily chart below. Both regions are experiencing higher inflation, with the FED having moved more aggressively versus the ECB, hence the weaker EUR against USD during previous months. However, the ECB has already been dropping hints that they will act to close the spread gaps in the fixed income markets, while ECB rates are expected to push higher into 2022 and possibly into 2023, leaving speculators to do their part and attempt to profit from the ever changing moves in these price spreads.
Not investment advice. Past performance does not guarantee or predict future performance.