US Fed preview April: Ever closer to the end of the Cycle

Upcoming Event - Wednesday, May 03, 2023,6:00 pm UTC: US Federal Reserve (Fed) interest rate decision

Macro commentary:

1. “Small” cracks emerge within the banking sector driving some banks to tap the Fed’s emergency lending program.
2. Inflation could remain “sticky” since the latest Employment Cost Index advanced faster than expected, even though the Fed’s latest and most important Core PCE inflation indicator came in “soft".
3. The US unemployment rate remains near historic lows.

Not too hot not too cold

The recent banking “crisis” situation appears to be stable, and inflation indicators are hinting at mixed signals

• Bets are on that the Fed will signal for a pause in the rate hiking cycle.
• The prospects for a 0.25% hike this week could be the last hike to be seen for a while.
• US gross domestic product (GDP) was “soft” during the first 3 months of 2023, despite solid personal consumption growth.

Commentary source based on charts 1, 2 and 3 and April FRED data.

The Fed’s next moves

From the minutes of the previous Fed decision the board members at the Federal Open Market Committee (FOMC), who ultimately make the final decision on whether or not to adjust interest rates, appear to be balanced on rate policy.

This “balance” could be a signal that interest rates are now very close to “normal”.

Higher rates if inflation data points to higher inflation However, with the mixed economic data and the balanced views from the FOMC, the odds could favor a pause in the interest rate cycle.

• The Fed might be less inclined to hike rates if GDP slows further
• If the US economy keeps on creating solid job numbers and prices do not start pushing lower, then the Fed could restart the hiking cycle

Global Stock Indices delivered strong returns over the last 30 days

Despite the uncertainty, stock indices around the world have been delivering positive returns.

Table 30-day % price moves source: Tradingview as of May 02 2023 9:20 UTC

Stock Indices pricing in hope?

• If companies see that the inflation outlook is cooling, companies may hold back passing on short term higher cost to consumers in order to keep market share
• Companies have had a long period of time to balance profit margins during the last year of interest rate hikes and companies could have less pricing pressures moving forward
• However, the situation across the banking system has become increasingly risky as banks hold back on lending which could create a credit crunch for those companies more exposed to higher interest rates for longer periods of time.

Bottom line: The May Fed decision could be the one that signals a pause in the rate hiking cycle, but the risk that inflation returns remains and the Fed still has a long way to go in order to reach its 2% inflation target.

Trade safe.