It’s been yet another lackadaisical session mostly and while there is some dollar softness, it isn’t anything that stands out when put into context of the moves since Friday last week. Trading sentiment this week has been mired by a general sense of waiting and wondering, as market players are without any big data or Fedspeak to work with.
If not for the surprises by the RBA and BOC, it would’ve been an even more arduous wait and fewer moves in markets in general.
As things stand, Fed funds futures are pricing in 69% odds that Powell & co. will not hike rates next week. The other 31% are for a 25 bps move. Even though that feels like markets are favouring the former outcome, it must be said this is about as close to a coin flip as you can get on Fed odds.
Historically, policymakers have been clear on what they will do next for the most part. It was only in recent months, that we saw markets being unsure of whether the Fed will hike more aggressively or less aggressively. But this will be the first in this cycle in which the debate is between leaving rates unchanged and to hike rates once more.
The optics is going to be rather important, whatever the Fed may decide. A move to the sidelines means there is a chance that the Fed may be done. Meanwhile, hiking again suggests that they could pause at the next meeting but that’s no guarantee – similar to what we’re seeing now.
In any case, markets will only have a day to firm up their convictions ahead of the main event next week. Because whatever you might be thinking now, it will all change once we get to the US CPI data on Tuesday.
If there are further signs of inflation slowing down significantly, that will be a major boost for those expecting the Fed to “skip” a meeting. It will also be a rather big boon for risk assets, all things being equal.
On the flip side, if inflation pressures are still rather persistent, there might be some angst and anxiety in markets as they prepare for another potential rate hike by the Fed.
In terms of Fed communication, it was a bit of a late message from the likes of Jefferson and Harker to call to “skip” a rate hike at the June meeting. It was right before the blackout period and there were no other speakers on the agenda, leaving markets unsure if this was indeed a coordinated message from the central bank or just personal opinion.
The fact that markets can’t really make up their minds when looking at the odds in Fed funds futures, tells us that they are going to leave it up to fate the US CPI data next week before placing more heavy bets.