Today is going to be a big day for the markets as we get the US CPI and the FOMC decision on the same day. The last time it happened was in June 2020.
I would argue that the US CPI will be the real mover as it will drive markets' expectations for the FOMC decision. Hot CPI and we can expect a sligthly hawkish Fed. Conversely, soft CPI and we can expect a neutral or slightly dovish Fed.
12:30 GMT/08:30 ET - US May CPI
The US CPI Y/Y is expected at 3.4% vs. 3.4% prior, while the M/M measure is seen at 0.1% vs. 0.3% prior. The Core CPI Y/Y is expected at 3.5% vs. 3.6% prior, while the M/M figure is seen at 0.3% vs. 0.3% prior. Click here to get the range of estimates.
This is going to be a big market moving release since it comes on the same day of the FOMC decision and it will influence their views (remember that they already got the data yesterday).
It looks like it's going to have a pretty binary outcome with higher-than-expected figures triggering a hawkish reaction (no cut expected for this year) and lower-than-expected readings leading to a more dovish repricing (two cuts expected for this year).
Data in line with forecasts shouldn't see the market pricing change much (one cut expected for this year) but it might give the risk assets a boost nonetheless.
As a reminder, the market got a bit uneasy last Friday as we got a hot NFP report where the wage growth surprised to the upside and the unemployment rate ticked higher to 4% (3.96% unrounded) setting a new cycle high. The market’s pricing got back to expect just one rate cut by the end of the year as we continue to jump between one and two.
18:00 GMT/14:00 ET - FOMC Rate Decision
The Fed is expected to keep interest rates unchanged at 5.25-5.50% with minimal (if any) change to the statement. The focus will be on the Summary of Economic Projections (SEP) and the Dot Plot. I see the Fed projecting two rate cuts for this year to bring it in line with market’s expectations.
This way it wouldn’t be seen neither dovish nor hawkish. If we see a deviation from this baseline, the market’s reaction will be dovish in case they project three cuts and hawkish in case they pencil just one cut.
The focus will then move on to Powell’s Press Conference where he will likely keep a neutral tone as always as the Fed continues to see inflation moving back to target but at a slower pace than before, and they remain cautious due to the fear of seeing the labour market faltering.
These views are based on the current state of things and since we have the US CPI report before the FOMC decision, they might change. In fact, if we get hot CPI figures, the market’s pricing will likely change to show just one cut for this year (or even none).
Therefore, the Dot Plot will likely display one cut for the year and have a different impact on the market with two cuts being seen as more dovish and no cuts as hawkish. A hot CPI report will likely have a greater impact compared to a soft one.
Conversely, if we get soft or in line figures, the original views should still hold although the market should react before the Fed’s decision as the risk-on sentiment will likely return.
