Fundamental

What do inflation and expectations tell about FED MEETING?

Author: Trade Pro Skills

Tuesday, 03 May 2022 Number of words: 383 Study time: 2 Minutes Views: 229

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CME Group expectation for 50bp moved above 98%

Market analyst – IFC Markets

Overall, the latest published inflation data confirm the previous readings have been revised down, reflecting a slowdown in US inflation and perhaps even a signal of a peak and preparing to hold at current levels or even reduce.

On Friday, April 29, the US Core PCE price index for March (excluding food and energy) in the monthly rate was stable at 0.3%, in line with market expectations and February number, while the annual rate was reduced to 5.2%, lower than market expectations, and the previous month (February) at 5.3%, which itself has revised down from initial 5.4% estimates. However, the monthly and annual rate of the PCE price index increased by 0.9% and 6.6%, respectively, higher than the previous month's numbers, respectively at 0.5% and 6.3%. But the optimism is that both mentioned February numbers were revised down from 0.6% and 6.4%.  

At the same time, we saw personal income also lowered to 0.5% in March from 0.7%, but it was more than the 0.4% market estimates. The critical point to mention is that the Personal Spending number, despite the higher inflation numbers, increased by 1.1% in March, almost twice more than February, and estimated at 0.6% and 0.7%, respectively.

While, according to a CME group survey, more than 98% of market participants are expecting a 50 basis points rate hike, which could be the largest interest rate hike since 2000, still there are some doubts around that, as we are seeing signals of declining economic growth and this sharp rate hike can lead the US economy towards stagflation. 

FED MAY MEETING

While the FOMC meeting will start today and continue for a whole day on Tuesday and Wednesday, Wall Street closed Monday with a slight gain after a sharp fall in the first hours. Dow Jones Industrial Average gained 0.26%, SP500 rose 0.57%, and the NASDAQ Composite ended the day 1.63% higher than opened price.

The market is now pricing on a 50bp rate hike, which means that if FED does the same as expected, we can see some slowdown in the markets, but it would not be too much because it is already priced in. On the other hand, if FED reacts more caution with just a 25bp rate hike, then we can see mighty bulls in the charts. 

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