Federal Reserve Holds Rates Steady, Says “Progress” on Inflation Stalled

“I don’t see the ‘stag’, I don’t see the ‘flation’.”  

Federal Reserve chair Jay Powell can be rather pithy at times. Lots of folks have warned about stagflation – the recent GDP and PCE data for example raised some concerns – but Powell was keen to point out this is not like the 1970s. Not like the 1970s yet, I guess you could say.  

The Federal Reserve left interest rates unchanged and signalled they’d be higher for longer – but it proved difficult for Jay Powell to out-hawk the market in the end. Markets had already priced out cuts and started to consider the possibility that the next move could be a hike.  

Powell was straightforward: “It’s unlikely that the next policy rate move will be a hike.”  

Nonetheless, cuts are going to take a little longer. The statement from the FOMC noted that “there has been a lack of further progress” on inflation. This was an explicit nod to the recent data being a little hotter than they would like. It wasn’t exactly dovish – “higher for longer” was the mantra and there was no explicit green light on a cut this year to ignite the bulls– but it was not as hawkish as the market had maybe been thinking it could be. Powell still thinks inflation is coming down. There is evidence to suggest that he may get a window soon…

The Fed’s Nowcast model suggests softening. May headline MoM CPI is currently at 0.02% and headline PCE is at 0.06%.  

Mixed Reception to Federal Reserve Meeting

After the Federal Reserve meeting, Treasury yields are lower, the dollar dropped sharply from a 6-month high hit earlier in the session, and stocks ended mixed. The Dow rallied to finish the day up a quarter of a percent but the S&P 500 index and Nasdaq composite both declined by a third of a percent. It was a choppy session in the end reflecting a fair bit of uncertainty – no clear signal about the path to cuts in H2.  

The gold price steadied, pushing up sharply after touching a month low, whilst bitcoin extended its run lower to a 2-month low. The Fed is saying we need more time to land the plane; the market is worried about the parachutes. It might get them soon – Powell hinted labour market data could start to soften.  

It wasn’t just the Federal Reserve yesterday. ADP data showed the economy added 192k jobs in April, whilst the ISM prices paid index rose to 60.9 from 55.8 in March. This fit the narrative of inflation pressures combining with a strong labour market; though the JOLTS report showed job openings down more than expected.  

ISM prices paid showing inflationary pressures resuming. 

Yen Intervention

Kudos to the Bank of Japan – waiting for the Fed to sound less hawkish to jam a massive intervention down the market’s throat.  

But it’s the same old problem with intervention — once spent you cannot spend it again and the market can just drift back to where it was — the point, I suppose, is to show they won’t let it drift any further than that.  

They drove it down to 153, where it bounced, but couldn’t get to the 152 mark, where we have seen some caution before.

European Stocks Mixed, FTSE 100 Gains on Standard Chartered and Shell

Stock markets in Europe are mixed this morning. Flat in Germany, down harder in France to weigh on the Stoxx 50 overall, but a higher open in London with Shell and Standard Chartered providing the boost.  

Shell added a few points to the FTSE 100 index, which rose by a third of a percent to 8,152 in early trade, as the oil major’s profits beat forecasts. Standard Chartered also rallied on a profit beat and dragged Asia-focused peer HSBC higher for good measure to deliver some heavyweight support to the FTSE 100 in early trade. Hong Kong rose again to extend its YTD gains to more than 5%.

Overall, it looks flat. Pretty much all the gains for the FTSE 100 index have come from those three stocks.

Oil prices fell hard for another day, sliding to a six-month low after the inventory report. Hopes that the US will refill its strategic reserve are providing some support this morning. Spot WTI here finding some support at our old 50% retracement level but has dropped below its 200-day line. 

Swiss Franc on the Move After Hotter-Than-Expected Inflation

And finally, CHF on the move vs. USD this morning, testing the 21-day EMA after Swiss inflation data came in higher-than-expected at 1.4%.

Swiss National Bank chairman Thomas Jordan said last week that the central bank had brought inflation under control, with the SNB forecasting price rises to be within its target 0-2% band for the next few years.