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Fed holds rates steady, signals one cut in 2024

The Federal Reserve (Fed) kept interest rate unchanged as expected on Wednesday, but signalled there may be only one interest rate cut to come this year. Stock markets were rallying before the Fed announcement due to US inflation data that came in below market expectations. Treasuries and gold saw large moves following the announcements.

Shane Strowmatt, LGT
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5 minutes
Fed building
© Shutterstock

While the Fed left its policy rate between 5.25% and 5.5%, updated forecasts showed the median Federal Open Market Committee (FOMC) member expecting just one 25-basis-point interest rate cut this year. Three months ago, the so-called “dot plot”, which shows Fed officials’ expectations for future interest rates, suggested there would be three cuts by the end of the year. Fed Chair Jerome Powell said current interest rate levels appear appropriate to continue to slowly reduce inflation and the central bank intends to keep rates steady as long as growth and unemployment remain around their current levels. One interest rate cut this year would also help the Fed to avoid accusations of intervening in politics, as it could potentially push back the start of the cutting cycle until December’s FOMC meeting, after the elections in November.

Inflation data sets off market rally

Earlier on Wednesday, the US Consumer Price Index (CPI) was reported to have remained flat on the month, coming in lower than market expectations for a 0.1% rise in May. Core CPI - which excludes volatile food and energy prices - increased by 0.2% when compared to April, which was also lower than the consensus of 0.3%. On an annual basis, headline inflation came in at 3.3% and core CPI was up 3.4%, the slowest pace in more than three years. Both year-on-year values are still clearly higher than the Fed’s 2% inflation target.

Equity markets shot up immediately following the inflation data release, with the Nasdaq-100 and S&P 500 both once again reaching new highs. The Nasdaq-100 closed 1.3% higher at 19,466.67 points and the S&P gained 0.9% to finish Wednesday’s session at 5421.03 points. The Dow Jones Industrial lost 0.1%. The dollar weakened and Treasury yields rose across the curve, despite coming down a bit following the Fed’s comments. Two-year yields were trading around 4.8% and ten-year yields near 4.3%. Gold shot up on the inflation figure, but by the end of Wednesday was trading not far from where it started the day around USD 2320 per ounce.

In the Asia-Pacific region, stock markets were mostly trading higher on Thursday. In South Korea, the Kospi shot up 1.2% after the government said it is extending a ban on short-selling of stocks. In Tokyo, the Nikkei 225 was trading 0.5% lower and Australia’s S&P/ASX 200 was up 0.4% after the release of labour market data that showed the unemployment rate fell to 4% in May from 4.1% in April. Hong Kong's Hang Seng Index was trading 0.3% higher, while the CSI 300 was down 0.4%.

German inflation accelerates

German CPI increased 2.4% on the year in May, an acceleration from the 2.2% increase in consumer prices registered in both April and March. Increases to services prices drove the CPI acceleration, while food and energy prices have been dragging down the rate of price increases, Germany’s Federal Statistical Office reported. At the end of last month, inflation in Germany was reported at 2.8% in May based on the harmonised calculation method used by the European Union. Despite the hot inflation figure, Germany’s DAX shot up 1.5% and the Euro Stoxx 50 closed 1.4% higher on Wednesday.

Elsewhere in Europe, the European Union said it will begin implementing new tariffs on electric vehicles imported from China. The new measures will be applied on top of existing duties and vary by carmaker. In the UK, the economy did not expand or contract in April, according to flash data that came out on Wednesday. The result was in line with market expectations and follows 0.4% expansion in March.

Corporate and macroeconomic calendars

Corporate news in focus: Quarterly figures from Adobe and Tesla annual general meeting.

Economic data in focus: SNB Financial Stability Report, Swiss Producer and Import Price Index, Spanish Consumer Price Index, US Producer Price Index and weekly initial jobless claims.

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

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