US Fed minutes to set market tone: Rate hike expectations

July 05, 2023 (MLN): Investors are eagerly anticipating the release of the minutes of the June meeting of the Federal Open Market Committee (FOMC), due to be released today at 23:00 PST. These minutes will pave the way for financial markets’ next direction.

The U.S. Federal Reserve paused its cycle of interest-rate increases for the first time in over a year at its latest meeting, keeping rates between 5% and 5.25%.

However, the Fed indicated that rates would rise to 5.6% by year-end, implying two more hikes of 25 basis points to address persistent inflation and a strong job market.

In addition to this, Fed Chair Jerome Powell stated last week that he is open to further rate hikes following the anticipated two 25bps moves.

Since March 2022, the FOMC has increased policy interest rates by a significant 500 basis points, starting from 0.25% and reaching 5.25%. Furthermore, the committee has swiftly reduced its holdings of securities.

Looking ahead, the next FOMC meeting is scheduled for July 25-26. Before that, two crucial economic indicators will be released: the June jobs report on Friday and the Consumer Price Index (CPI) on July 12.

In May 2023, the CPI inflation stood at 4%, showcasing the Federal Reserve's accomplishment in curbing inflation to a certain extent. This significant decrease follows a peak of 9.1% in June 2022. It can be attributed to the fast-paced rate hikes and balance sheet reductions implemented by the Federal Reserve.

Similarly, the U.S. personal consumption expenditure (PCE), which is the Fed’s preferred inflation type, also fell below 4% for the first time since May 2021.

However, core PCE inflation remains a concern, with projections indicating it will continue to surpass overall inflation. The median projection suggests a core PCE inflation rate of 3.9% for this year.

Markets

The U.S. stock market index S&P 500 (SPX) went up by 6.47% in the month of June and 16.51% year-to-date, while the technology index Nasdaq (NDX) recorded a 6.49% in June and is up 37.51% YTD.

The U.S. dollar index (DXY) recorded a fall of 1.25% in June and is up 1.01% YTD.

Spot gold closed at $1,919.36 marking a monthly decline of 2.21%, narrowing the YTD gain to 5.74%

Notably, this marks a 7.38% decline from the new all-time high it made in the previous month before experiencing a sharp sell-off.

Meanwhile, Brent crude and West Texas Intermediate crude (WTI) concluded the month with an increase of 4.20% and 4.21% respectively, halting a seven-month period of predominantly declining trajectory. However, prices are down more than 12% YTD.

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