The Federal Reserve raise rates by 25 basis points as per expectations to 5.00% to 5.25% (although there were plenty who thought otherwise as well). The rate is now at the target terminal rate from the last Fed Dot plot from March.

During the May FOMC press conference, Federal Reserve chair Jerome Powell highlighted the following key points:

  • Support for rate hikes was strong, but a pause was not decided at this meeting.
  • Policymakers believe they are close to the end of the tightening cycle.
  • Non-housing inflation has not moved much, and cutting rates would not be appropriate given expectations for inflation to take time to come down.
  • Credit tightening is a focus, as it affects the assessment of whether the policy stance is sufficiently restrictive.
  • Prices and corporate margins are expected to come down as the goods pipeline normalizes.
  • Avoiding a recession is more likely than experiencing one, and if a recession occurs, they hope it will be mild.
  • Labor market cooling could continue without significant increases in unemployment.
  • The labor market is very tight with high job openings.
  • Inflation is well above the goal, and the focus is on bringing it down.
  • The current policy stance may be sufficiently restrictive and not far from the right level.
  • Real rates are around 2%, meaningfully above the neutral rate, and policy is tight.
  • The Fed aims to reach a sufficiently restrictive stance to bring down inflation over an extended period.
  • Credit tightening complicates the assessment and adds uncertainty.
  • Determining the extent to which a firmer policy is needed will be an ongoing, meeting-by-meeting process.

Now that the Fed has reached the terminal rate target that has remained the same for two consecutive dot plots, you get the feeling that Fed wants to pause, but they are still not ready to say it/admit it.

How did the markets react?

Yields are moving lower and accelerating the declines. Is the declines in reaction to continued concerns about banks? Is it a rotation out of stocks and into the safety of the US debt? Is it because the US has a hard landing? Is it lack of confidence in the Fed, after all the Fed Chair said that banking is ok days after the 2nd largest banking failure? Is it all of the above?

What we do know is the "market" is not giving up on rate cuts, while the Fed Chair may not want to say "pause" but if it is a pause, he is still convinced that rates are not going down. He didn't say it, but he seems to "not even be thinking about, thinking about easing" any time soon.

Looking at the yield curve, the market has taken yields lower with the short end leading the way:

  • 2 year yield is trading at 3.58%, -12.2 basis points
  • 5 year yield is at 3.37% -12.9 basis points
  • 10 year yield is at 3.56% -8.3 basis points
  • 30 year yield is that the 3.681% -5.1 basis points

The January Fed funds contract is trading at a yield of 4.31%. That is now pricing in a cut of 75 to 100 bps from the current range.

In the US stock market, the price action did see the indices move higher during most of the presser, but when the Fed Chair said that "cutting rates would not appropriate" given expectations for inflation to take time to come down, they started to move to the downside. The final stock indices are showing:

  • Dow Industrial Average -270.29 points or -0.80% at 33414.23
  • S&P index -28.83 points or -0.70% at 4090.74
  • NASDAQ index -55.19 points or -0.46% at 12025.32
  • Russell 2000 actually rose 7.17 points or 0.41% at 1739.28

In the forex, the JPY is the strongest of the major currencies while the USD is the weakest. The greenback fell -1.00% vs the JPY and -0.80% vs the CHF and -0.74% vs the GBP. The levels are off the lowest level that came soon after the rate decision (on the initial reaction). It was marginally lower vs the CAD and AUD.

Forex
The USD is the weakest of the major currencies

Technically, the EURUSD reached a high of 1.1091 which was just 4 pips shy of the 2023 hi price reached last week at 1.1095. The price is also back below the swing area between 1.10669 and 1.10751 (see red numbered circles and yellow area on the chart below). Swing area support comes in between 1.1036 and 1.10443. The 200 hour moving average at 1.10114 and the 100 hour moving average at 1.10068 as other key support targets on further weakness in the new trading day. On topside, a move back above 1.1075 is needed to give the buyers some confidence that another run toward the 2023 high is needed.

EURUSD
EURUSD backs off after test of 2023 high

The USDJPY is trading above and below it's a 200 hour moving average at 135.07 after reaching a low near 134.82. The low price stalled near the 61.8% retracement of the move up from the April 26 low. At the low, the price will blow a swing area between 135.13 and 135.36. The current price at 135.20 is in between that swing area and will be the barometer for buyers and sellers in the new trading day. Move above 135.36 and a bias shifts more in favor of the buyers. Move below 135.135 and sellers are more control with the 100 hour moving average at 134.437 another key downside target.

USDJPY
USDJPY trades within a key swing area into new trading day

Tomorrow Apple shares will be released after the close. Before that European ISM service data will be released ahead of the ECB rate decision at 8:15 AM. The ECB is expected to raise rates by 25 basis points to 3.75% from 3.5%.

US unemployment claims are expected to come in at 239K versus 230K. Nonfarm productivity for the 1st quarter and unit labor costs will also be released with productivity declined by -1.7% as a result of a higher unit labor costs of +5.6%. That's not a good mix and supports the FOMC rate decision today. That on Friday, the US jobs report will be released, where expectations are for a gain of 180K. Goldman Sachs increased their estimate from 225K to 2.5 K today given the stronger-than-expected ADP employment report which came in at 296K, well above the 148K estimate.

Thanks for the support.

Good fortune with the trading