Fantastic, Then

The Federal Reserve’s (Fed) dot plot plotted one rate cut for 2024, down from three in March and the Fed revised its inflation forecasts higher. But the Fed’s announcement didn’t get more hawkish than this because the distribution of the dots was much narrower than in March; 7 members plotted a one-cut preference while 8 members favoured two cuts, and 4 suggested that the Fed should not cut rates this year but hey… As a result, the distribution of the dots between those who voted for one and two rate cuts was more dovish than I expected. Plus, the dots also suggested 4 rate cuts in 2025 instead of 3, so one rate cut just jumped over to the next calendar year. And finally, we heard the Fed tweak its communication slightly: they no longer think that there is a ‘lack’ of progress in inflation toward the 2% goal but a ‘modest further progress’ instead. And that’s a big deal for the doves obviously because a progress is a progress even if it’s small. And the cherry on top, the CPI update that came in a few hours before the policy announcement was softer-than-expected. Both headline and core CPI printed a weaker-than-expected figure in May on both monthly and yearly basis, and core inflation even cooled to the slowest pace in more than 3 years. Fantastic.

The US 2-year yield tipped a toe below 4.70% but has rebounded above 4.75% this morning, the 10-year yield hit 4.25% before rebounding, the S&P500 and Nasdaq took advantage of the dovish vibes to extend gains toward a fresh record. Even the Stoxx 600 could cheer up a little. If inflation data shows further ‘modest’ progress, there is no reason we see the equity rally abate this summer.

In the FX, the US dollar index took a sharp dive below the 50-DMA yesterday on the back of a softer-than-expected CPI report and a sufficiently dovish Fed statement. The EURUSD rebounded past its 50, 100 and 200-DMA, traded as high as 1.0850 before easing to 1.08 – this is where the pair consolidates this morning. I maintain a neutral outlook as a further USD weakness should be countered by sustained downside pressure on the euro due to the chaotic political scene in France. Investors are most likely recovering from the kneejerk shock, the French 10-year yield eased yesterday on Macron’s announcement that he won’t quit his presidential seat even if he loses majority at the upcoming legislative elections. The latest polls suggests that Le Pen could win 31% of the first round votes while Macron is seen securing only 18%. But some think that the chaos that Mr Ciotto caused among Republicans could help consolidate power around a more balanced group than Le Pen’s National Rally, and Macron could offer that balanced harbour. In all cases, whatever it is, the outlook for the EURUSD remains neutral to slightly positive. The political shenanigans are still a short-term downside risk for the single currency but a sustainably softer US dollar should help the euro hold ground against the greenback.

Across the channel, Cable is preparing to test the March peak despite election jitters as a likely Labour victory in the UK is unusually seen as being a positive outcome for both sterling and the British assets. Here in Switzerland, a further dollar weakness could prevent the franc from extending losses – which wouldn’t be a bad news per se for the Swiss National Bank’s (SNB) fight against inflation that also picked up a certain momentum in the past few readings. On the flip side of the globe, the USDJPY barely reacts to the Fed decision and to the dollar’s broad-based weakness, as the Bank of Japan (BoJ) is not expected to throw fireworks at its scheduled meeting tomorrow, and finally in Australia, the Aussie-dollar gained the right to remain in the bullish trend, after having successfully held ground above a major 38.2% retracement on April to May rebound. The pair could extend gains to 68 cents.

In the energy space, US crude made an attempt on the $79pb level yesterday, fueled by dovish Fed expectations and the reflation flows, but the latest EIA data showed an unexpected 3.7-mio barrel build in the US inventories last week and the IEA said yesterday that global oil market faces a ‘major’ surplus this decade due to the shift away from fossil fuels. They predict that oil demand will level off around 105.6 mio barrels per day and that there will be around 8 mio barrel gap with the supply: the supply being higher than the demand by end of the decade. But the end of the decade is still a ways off, and the current reflation trade could help oil bulls make an educated attempt at the $80 per barrel resistance.