Fed FOMC Preview: Powell to Channel His Inner Hawk as Inflation Fears Return

Economic

Central Bank

Summary:

Markets are on edge ahead of the Federal Reserve’s latest policy meeting. I believe the Fed will lean hawkish with its messaging as inflation fears return. Contrary to the consensus view, there is a growing risk that the Fed will hold off on cutting rates altogether this year.

The Federal Reserve will announce its latest policy decision at its second meeting of the year today, and the stakes are high.

No action by the U.S. central bank on the rates front is seen as the most likely outcome. However, updated projections for interest rates and fresh commentary from Fed Chairman Jerome Powell may be a wild card, potentially signaling fewer rate cuts and a later start to policy easing than previously anticipated.

As such, there will be a lot on the line when the U.S. central bank delivers its monetary policy decision and updated economic projections at 2:00 PM ET on Wednesday afternoon.

What to Expect From Today's Rates Decision:

The Fed is all but certain to keep the benchmark Fed funds target range between 5.25% and 5.50%, where it has been since last July.

Fed FOMC Preview: Powell to Channel His Inner Hawk as Inflation Fears Return_1

FOMC policymakers will also release their new forecasts for interest rates and economic growth, known as the "dot plot", which will reveal greater signs of the Fed's likely rate trajectory through the rest of 2024 and beyond.

In December, the "dot plot" showed Fed officials anticipate three interest rate cuts this year and an additional easing of 100 basis points in 2025.

All eyes will then turn to Fed Chair Powell, who will hold what will be a closely watched press conference, as investors look for fresh insight into his views on the economy and inflation and how that can affect monetary policy in the months ahead.

Despite market expectations for multiple rate cuts this year, traders have begun to adjust their forecasts following a recent batch of hot inflation data, signaling a potential shift in sentiment towards a more cautious approach to monetary policy.

After starting the year predicting as many as seven rate cuts, investors now expectjust three, with the timing of the first move pushed back from March to June.

With that being said, even the odds of a June cut have been falling in recent weeks. At one point Monday, swap contracts that predict decisions by the U.S. central bank showed a less than 50% likelihood that policymakers will deliver their first interest rate cut in June.

Fed FOMC Preview: Powell to Channel His Inner Hawk as Inflation Fears Return_2

As of Wednesday morning, the Investing.com Fed Monitor Tool pegs the chances of a 25-bps rate cut in June at around 60%, down from over 90% just a few weeks ago.

Prediction: Hawkish Fed Is Back

I believe there is a substantial risk the Fed could strike a more hawkish tone than expected as inflation remains well above the central bank’s 2% target, the economy holds up better than expected, and the labor market remains strong.

In addition, the recent pickup in the rate of inflation will prompt Fed officials to downwardly revise their projections to imply two rate cuts this year, from three cuts previously.

As such, Powell will attempt to push back against market expectations for an imminent rate cut and reiterate that he only sees cuts happening when the Fed is confident inflation is sustainably moving back to its 2% goal.

Bottom line is this is not an environment conducive to cutting interest rates.

Contrary to the consensus view, I am of the opinion the Fed could hold off altogether on lowering rates this year as inflation takes longer to return to the Fed's target than many had hoped.

After June, the Fed only has four more meetings in 2024: in July, September, November, and December.

Taking that into account, it is looking increasing likely that the upcoming U.S. presidential election cycle could interfere with the start of the Fed’s easing cycle, as the central bank would prefer not to shift to a rate cutting cycle at the last FOMC meeting before the election.

That being the case, the Fed could keep rates higher for longer than markets currently anticipate.

What to Do Now:

Any indications or shifts in the Fed's tone during the meeting could trigger significant market movements and investor sentiments. Taking that into consideration, market participants are advised to remain vigilant, exercise caution, and diversify portfolios to hedge against potential market fluctuations.

Given markets have moved higher on the prospect of the Fed cutting rates this year, a shift to fewer rate cuts could be considered a threat to the market rally.

Source: Investing.com

To stay updated on all economic events of today, please check out our Economic calendar

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Devin

Commodity

Market Overview

Wednesday saw a sideways movement in oil prices, attributed to a stronger dollar and profit-taking after a recent rally. The rising U.S. dollar, marking its fifth consecutive session of gains, has made oil more expensive for holders of other currencies, thereby suppressing demand. Market eyes are on the Federal Reserve’s interest rate decision for further cues.

Crude oil supplies face potential constraints following Ukrainian drone strikes on Russian refineries, with Brent and WTI hitting their highest levels since late October. OPEC+’s continued production cuts into the second quarter of 2024 and possible supply reductions due to Russian export complications further underscore the tension.

These dynamics suggest a bullish outlook for refined products and potentially tighter markets for both oil and natural gas, as disruptions could force Russian producers to cut supply if export challenges persist.

Natural Gas Price Forecast

Natural Gas and Oil Forecast: Drone Strikes Push Energy Prices; Buy Today?_1

On March 20, Natural Gas (NG) experienced a modest increase, climbing 0.27% to trade at $1.8650. This slight uptick is situated within a complex market landscape, with the asset currently navigating around a pivot point of $1.8531.

The technical outlook delineates key resistance levels at $1.9011, $1.9426, and $1.9851, suggesting potential barriers to upward momentum. Conversely, support is established at $1.8093, $1.7761, and $1.7388, marking crucial points where further declines may be arrested.

The 50-Day and 200-Day Exponential Moving Averages, at $2 and $1.9198 respectively, indicate a bullish sentiment above the pivot.

WTI Oil Price Forecast

Natural Gas and Oil Forecast: Drone Strikes Push Energy Prices; Buy Today?_2

USOIL edged higher, trading at $82.53, a modest gain of 0.09%. This movement reflects a cautiously optimistic sentiment in the oil market, pivoting around a key pivot point of $82.31. The market delineates clear resistance levels at $83.27, $83.99, and $84.74, which could cap further advances.

Conversely, support levels are established at $81.56, $80.84, and $79.95, serving as potential fallbacks in case of a decline. The technical landscape is further illuminated by the 50-Day Exponential Moving Average (EMA) at $81.36 and the 200-Day EMA at $79.46, both underpinning the current price level.

Given this configuration, USOIL’s trend appears bullish above $82.31, with a breach below this threshold potentially precipitating a sharp downturn.

Brent Oil Price Forecast

Natural Gas and Oil Forecast: Drone Strikes Push Energy Prices; Buy Today?_3

UKOIL marginally increased by 0.03%, trading at $87.20. This subtle uptick reflects the market’s cautious optimism amidst current dynamics. With a pivotal point at $86.97, the asset’s immediate resistance and support levels are distinctly outlined.

Resistance is anticipated at $87.75, $88.42, and $89.06, indicating potential thresholds for upward movement. Support, on the other hand, is found at $86.44, $85.60, and $84.93, marking critical zones where declines may find a floor.

The technical stance is reinforced by the 50-Day and 200-Day Exponential Moving Averages (EMAs) at $85.78 and $83.74, respectively, underscoring a bullish sentiment above the $86.97 mark.

Source: FX Empire

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Thomas

Economic

Central Bank

Indonesia's central bank held key benchmark rates steady on Wednesday, as forecast, and reaffirmed its conviction that monetary policy could be eased in the second half around the time the U.S. Federal Reserved is expected to cut rates.

Bank Indonesia (BI) kept the benchmark 7-day reverse repurchase rate at 6.00%, matching predictions by all 31 economists polled by Reuters. Its two other main policy rates were also kept unchanged.

The decision was in line with efforts to maintain stability of the rupiah and control inflation, Bank Indonesia Governor Perry Warjiyo said.

The rupiah has lost around 1% in the past week, with Monday's drop the biggest since late January. It was unchanged after BI's announcement, which followed the Bank of Japan's landmark decision on Tuesday to end years of negative interest rates in a move that could affect Japanese funds invested abroad.

BI's policy decision also came ahead of the Federal Reserve's policy review expected later on Wednesday. The U.S. central bank is not expected to cut borrowing costs this week, but markets will closely watch Fed Chair Jerome Powell's comments on when it might start to ease monetary policy.

BI maintained its view the Fed will reduce rates in the second half of the year, Warjiyo said, while adding he is not seeing much impact from BOJ's shift.

"We don't see that policies by BOJ will have a big impact on capital flows or exchange rate, because movements of many currencies are still determined by the U.S. dollar that is still quite strong," Warjiyo said.

He reiterated that BI sees room to cut interest rates in the second half of this year, with inflation seen remaining within target through to 2025, even as analysts say Southeast Asia's largest economy is in need of stimulus amid falling exports.

Some economists expected BI to take its cue from the Fed on the timing and magnitude of monetary easing, in order to keep a certain yield spread between assets in Indonesian rupiah and U.S. treasury yields.

"There is considerable uncertainty in the pipeline with regards to the direction of global interest rates, particularly for the U.S. Fed as markets continue to delay expectations of a start to the rate easing cycle," Radhika Rao, a DBS economist said.

BI on Wednesday also kept Indonesia's economic growth outlook for 2024 in a range of 4.7% to 5.5%.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Ukadike Micheal

Economic

Stocks

Dow Jones futures, along with S&P 500 futures and Nasdaq futures, edged lower early Wednesday ahead of the Federal Reserve's conclusion of its two-day meeting. Investors closely watched the Fed's rate-cut outlook, which remained a focal point amidst market volatility. Despite initial losses, the stock market rally exhibited modest gains on Tuesday, particularly the Nasdaq, showing resilience.

Nvidia (NVDA) initially saw a retreat following its significant AI event, but later reversed to a slight uptick. Several other artificial intelligence stocks also pared losses or turned positive. However, Advanced Micro Devices (AMD) experienced a solid retreat, while Super Micro Computer (SMCI) tumbled due to plans for a share offering.

Early Wednesday, Broadcom (AVGO) was set to hold an AI investor meeting as the Nvidia GTC conference continued. Micron Technology (MU) was slated to release fiscal Q2 results later in the day, with implications for the AI sector as well. Meanwhile, Microsoft (MSFT) was scheduled to host its own AI event on Thursday.

Bitcoin continued its slide, dropping to approximately $61,000, while the stock market rally showcased resilience, particularly with the Nasdaq's slight reversal higher.

In Tuesday's stock market trading, the Dow Jones Industrial Average rose by 0.8%, with the S&P 500 climbing 0.6% to reach an all-time closing high. The Nasdaq composite gained 0.4%. Both the Dow Jones and Nasdaq held support at key moving averages, reflecting market strength.

Market breadth remained strong, with the small-cap Russell 2000 advancing 0.5%, though still below its 21-day line. However, certain highflying stocks, including Super Micro, weighed on the index.

Throughout March, the stock market rally experienced pauses, particularly evident in the Nasdaq and Russell 2000. This allowed for the formation of some bases, with the 50-day moving average narrowing the gap vs. the Nasdaq, potentially providing room for further advances.

Notably, the resilience shown by major AI leaders like Nvidia and Microsoft was encouraging, as their performance often influences broader market sentiment. Additionally, various sectors, including commodities and energy, demonstrated strength alongside leading tech stocks.

The Fed rate-hike outlook and Powell's commentary were anticipated to significantly impact stocks and Treasury yields following the conclusion of the Federal Reserve meeting. This event essentially serves as an earnings report for the entire market, with potential for swift market swings post-announcement.

Looking at other market indicators, the 10-year Treasury yield saw a slight decline, ending a recent streak of gains but remaining close to 2024 highs. U.S. crude oil prices rose to their highest level since late October, signaling strength in the energy sector.

Reflecting on sector-specific ETF performance, the iShares Expanded Tech-Software Sector ETF (IGV) climbed, buoyed by holdings like Microsoft and CrowdStrike. The VanEck Vectors Semiconductor ETF (SMH) dipped slightly, influenced by dominant components such as Nvidia and AMD.

In the realm of speculative stocks, ARK Innovation ETF (ARKK) experienced a slight decline, while ARK Genomics ETF (ARKG) rose marginally.

Sector-wise, the SPDR S&P Metals & Mining ETF (XME) advanced, alongside the SPDR S&P Homebuilders ETF (XHB) and the Energy Select SPDR ETF (XLE). Similarly, the Health Care Select Sector SPDR Fund (XLV) and the Industrial Select Sector SPDR Fund (XLI) rallied, indicating broad market strength.

Market participants awaited the Federal Reserve's decision with bated breath, cognizant of its potential to trigger significant market movements. Amidst ongoing market volatility, resilience in certain sectors and stocks offered glimmers of optimism, suggesting that the market remained poised to weather uncertainties and capitalize on emerging opportunities.

Source: Investor's Business Daily

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Ukadike Micheal

Economic

Forex

In February 2024, the UK's Consumer Prices Index including owner occupiers' housing costs (CPIH) rose by 3.8% over the past 12 months, marking a notable decrease from January's figure of 4.2%. This reduction indicates a significant moderation in inflationary pressures within the economy, suggesting potential shifts in consumer spending patterns or supply chain dynamics.

Similarly, the Consumer Prices Index (CPI) increased by 3.4% during the same period, reflecting a downward trend from January's rate of 4.0%. Such a decline in inflation figures could signal adjustments in pricing behaviors among businesses or changes in consumer demand patterns, influenced by various economic factors such as employment levels, wage growth, and global commodity prices.

Of particular interest is the monthly change in both CPIH and CPI annual rates, which saw substantial downward contributions from sectors such as food, restaurants, and cafes. These sectors are often sensitive to changes in consumer sentiment and disposable income, highlighting the potential impact of economic conditions on consumer spending patterns and inflation dynamics.

Conversely, certain sectors, such as housing and household services, as well as motor fuels, made significant upward contributions to the monthly change in CPIH and CPI annual rates. Factors such as energy prices, housing market dynamics, and transportation costs can influence these sectors, affecting overall inflationary pressures within the economy.

Furthermore, core inflation measures, which exclude volatile components such as energy, food, alcohol, and tobacco, also experienced notable shifts. Core CPIH and core CPI both witnessed decreases in their 12-month rates compared to January, indicating underlying changes in inflationary pressures once volatile components are removed from the calculation.

From a technical standpoint, the decline in inflation figures may have implications for monetary policy and market sentiment. A moderation in inflation could alleviate pressure on the Bank of England to tighten monetary policy aggressively, potentially supporting accommodative measures to stimulate economic activity. However, policymakers will likely remain vigilant for any signs of inflationary pressures persisting above target levels, which could prompt a reassessment of policy actions.

Wednesday's marked decline in inflation figures prompted UK chancellor Jeremy Hunt to assert that the nation's economic plan is yielding results, with inflation projected to reach the 2% target in the coming months. Hunt's statement underscores the government's commitment to managing inflationary pressures and fostering economic stability, particularly amid ongoing challenges such as supply chain disruptions and global economic uncertainties.

As Prime Minister Rishi Sunak seeks to rally Conservative MPs behind the party's economic strategy, recent internal turmoil over racism allegations looms alongside concerns about potential leadership challenges, particularly if the party underperforms in the upcoming local elections on May 2. The political landscape adds another layer of complexity to the economic outlook, as policymakers navigate both domestic and international developments to support growth and stability.

While the decrease in inflationary pressures offers some relief and optimism for policymakers, challenges persist on both the economic and political fronts. The trajectory of inflation will continue to influence monetary policy decisions and market expectations, underscoring the importance of monitoring economic indicators and navigating potential risks with prudence and agility.

Source: Financial Times

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Ukadike Micheal

Economic

Forex

The yen faces potential decline to three-decade lows against the dollar following the Bank of Japan's decision to end negative interest rates without clear guidance on future hikes, leaving the Federal Reserve pivotal for near-term moves. The BOJ's move had minimal impact on the interest rate gap between Japan and the US, with traders awaiting clues from the Fed's forecasts for further direction.

A rapid decline in the yen could lead to intervention by Tokyo officials, although the cheap yen supports Japanese equities and carry trades, it poses political pressure due to inflation concerns. While some analysts see the BOJ's move as a turning point towards yen appreciation, the immediate trend favors the dollar.

The yen's recent slide puts it within range of its 2022 nadir against the dollar and its lowest level against the euro since 2008. With Japan's policy rate at 0% to 0.1%, significantly lower than the Fed and the European Central Bank, uncertainty persists regarding the BOJ's future actions despite forecasts suggesting no further hikes in the near term.

Looking beyond upcoming meetings, market participants are evaluating the long-run policy rates of both the BOJ and the Fed. Speculation revolves around whether the BOJ will remain "one-and-done" or reach a neutral rate, which could potentially strengthen the yen against the dollar by 15% to 20% according to some forecasts.

While the median forecast suggests the yen will strengthen to around 139 per dollar by year-end, discussions increasingly focus on the long-term monetary policy settings of both central banks. The Fed's upcoming release of new forecasts may influence market sentiment, potentially mitigating the impact of the BOJ's recent decision.

Despite the large short position in yen among global traders, concerns linger regarding potential shifts in positioning, particularly in response to developments such as a rally in US treasuries. At American Century Investments, fundamental factors such as growth differentials and portfolio flows are highlighted as key determinants of the yen's trajectory.

As the market awaits the Fed's decision, analysts foresee the yen's 2022 low being tested if US policymakers signal prolonged unchanged rates. While verbal warnings from Tokyo officials are anticipated in such a scenario, market intervention remains unlikely for the time being.

From a technical perspective, the uncertainty surrounding central bank policies and interest rate differentials between major economies significantly impacts currency markets. Traders closely monitor statements and actions from central banks, as shifts in monetary policy expectations can lead to abrupt movements in currency pairs. Moreover, the interplay between economic fundamentals, investor sentiment, and geopolitical developments further complicates currency trading strategies.

The yen's recent trajectory against the dollar underscores the importance of central bank policies and their implications for currency markets. While short-term movements may be influenced by central bank decisions and market sentiment, long-term trends are shaped by fundamental factors such as economic growth, interest rate differentials, and portfolio flows. As investors navigate these dynamics, vigilance and adaptability are key to capitalizing on opportunities and managing risks in the ever-evolving foreign exchange market.

Source: Bloomberg

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ING

Forex

Central Bank

Economic

USD: Does the Fed continue to expect three cuts this year?

It is FOMC day and the focus tonight will be on the Federal Reserve's statement, the economic projections and Fed Chair Jay Powell's press conference. As James Knightley discusses in our Fed preview, it would only take two FOMC members shifting their expectations for the Fed dot plots to show two instead of three rate cuts this year. Markets currently price only 70bp of Fed rate cuts this year, and thus a shift to just two expected cuts would open the way for higher short-term US rates and a modestly stronger dollar.

Today's FOMC meeting should also set the dollar tone for the next couple of weeks since the next key US data release is not until 29 March, when the February core PCE deflator is released. The consensus for that number is already an awkward 0.3% month-on-month reading. This would again interfere with the Fed's disinflation narrative.

The dollar still seems to be lagging the recent pick-up in US rates and even if the Fed did stick with three expected cuts this year, we doubt the dollar would sell off for long. We really need to see the data turn lower for a noticeable dollar bear trend to now emerge.

DXY to stay bid in a 103.50-104.00 range heading into the FOMC meeting.

Elsewhere, there will be much focus on the Brazilian rate decision tonight. Another 50bp cut should be delivered but the central bank may row back from promising further 50bp cuts at future meetings.

EUR: ECB big hitters on the wire today

EUR/USD ended lower yesterday despite a bounce in the German ZEW investor survey back to levels last seen in early 2022. Most likely positioning ahead of tonight's FOMC meeting is dominating and the dollar is playing a little catch-up with last week's rise in higher short-term rates. Out of the eurozone today we have March consumer confidence plus also five European Central Bank speakers. Amongst those five are the big hitters Christine Lagarde, Isabel Schnabel and Philip Lane. Expect a repeat of the central message that more data is required before the ECB can seriously consider a rate cut at the June meeting. EUR/USD probably risks a drift to the 1.0800 area pre-FOMC.

In the UK we get to see February CPI. The key services inflation number is expected to fall to 6.0% year-on-year. That move is widely expected due to base effects and probably does not move the needle for Thursday's Bank of England meeting. We see that meeting presenting upside risks to sterling – ERUR/GBP to test 0.8500 – if as we expect, the BoE keeps forward guidance the same and provides few clues around the timing of the first rate cut.

CZK: CNB to cut rates by another 50bp

The Czech National Bank is scheduled to hold its second meeting of the year today. After last week's statements, we were forced to revise our expectations from a 75bp rate cut to a 50bp cut to 5.75%, which implies the same pace of rate cuts as in February. Today's meeting is without a new forecast and the board will only discuss an internal update. However, the numbers released since the February meeting have surprised in mostly dovish ways, including large surprises in headline and core inflation.

However, the board wants to stay on the safe side, which we believe is mainly due to the weaker koruna and the experience of FX weakness after the last rate cut. Nevertheless, we expect to see two votes for a 75bp rate cut today, which, coupled with our inflation outlook falling below the central bank's 2% target in the coming months, should keep the story unchanged. That said, we believe a 75bp rate cut remains on the table for the next meeting and so will be looking for cues today on how close the board is to speeding up the pace of cuts in future.

The market has adjusted its expectations slightly after the hawkish CNB statements last week but still maintains some probability for a move higher than 50bp today. A 50bp move should thus be seen as hawkish despite last week's indication.

However, as mentioned earlier we expect the vote split and inflation outlook to keep the dovish tone of the meeting. Thus, we expect a flatter FRA curve and at the same time, the IRS curve should not suffer too much especially at the belly and long end given the sell-off in recent days across the board. Thus, today's meeting should not have too many implications for the CZK. In our view, higher rates at the short end of the curve point to a lower EUR/CZK around 25.200, where we could see the end of the day, or slightly lower.

CEE: Headline risk is gone and PLN remains cheap

In addition to the CNB meeting in the Czech Republic, in the CEE region, several releases will be published today. This morning we could see industrial production in Romania. And later we will see data from the labour market, industrial production and PPI for February. According to our forecasts, industrial output growth remained subdued in February, although recent PMI readings give some hope of recovery. Wages in the enterprise sector continue to rise at a double-digit pace. The labour market remains tight and the scarcity of labour, along with high minimum wage increases, is putting upward pressure on wages.

Poland's zloty rebounded yesterday even though the political noise around the central bank hit the headlines as we expected. Markets seem to have fully got used to headlines of this nature and weaker PLN levels in recent days may thus be an attractive entry level since this risk is off the table for this week. As we discussed yesterday, EUR/PLN has broken away from rates significantly and we think this gap will be closed by a move back to 4.300 in the coming days.

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Fed FOMC Preview: Powell to Channel His Inner Hawk as Inflation Fears Return

What to Expect From Today's Rates Decision:

Prediction: Hawkish Fed Is Back

What to Do Now:

Source: Investing.com

Natural Gas and Oil Forecast: Drone Strikes Push Energy Prices; Buy Today?

Market Overview

Natural Gas Price Forecast

WTI Oil Price Forecast

Brent Oil Price Forecast

Source: FX Empire

Indonesia C.Bank Stands Pat On Rates, Focus On Rupiah Stability

Source: Reuters

Stock Futures Dip as Investors Await Fed's Rate-Cut Outlook Amid Tech Sector Resilience

Source: Investor's Business Daily

Hunt Capitalizes on Declining UK Inflation, Aims for Achieving 2% Target

Source: Financial Times

Yen's Susceptibility to Fed Heightened as BOJ Leaves Traders Speculating on Further Rate Hikes

Source: Bloomberg

FX Daily: Dots in Focus

USD: Does the Fed continue to expect three cuts this year?

EUR: ECB big hitters on the wire today

CZK: CNB to cut rates by another 50bp

CEE: Headline risk is gone and PLN remains cheap

Risk Disclosure