Markets Drop Ahead of Fed Talks & Testimony

Before The Bell: S&P 500

Futures for US equities have fallen this morning ahead of Fed talks and testimony. YM fell 1.6%, ES fell 1.9%, RTY fell 2.0% and NQ fell 2.2%. The US Treasuries have been rising by 4-9 basis points. The long end of the curve is leading the rise. The major curve spreads are uneven. Although there is no clear catalyst, global risk sentiment remains dominated by concerns about rising rates and the negative effects it will have on the economy. According to many trading desks, this has been a profitable strategy.

Once inflation is less certain and policymakers are able to shift toward growth-friendly policies, the selling of risk sentiment rebounds will continue to be profitable. There is no one reason that crude oil is falling. Analysts point out the negative risk sentiment and concerns about the demand side of the equation given the predictions of a slowdown. Reports claim that President Biden may consider suspending the federal gasoline tax. However, economists are skeptical of the idea because it will only boost demand at a time when supply is limited.

Harker, Evans, Barkin, and Evans will all speak on behalf of the Fed. The statistics side of things is where the June EU Flash Consumer Confidence figures and April CPI figures are for Canada. After hours, the API will publish its measure for energy inventory. German 2038 debt and US 20yr will both be sold in terms of supply.

Fed and Congress

This is the first day for Fed Chair Powell to testify before legislators in his semi-annual testimony. Since these events often take on a political slant, the Chair will need to find a way to reconcile how Fed manages to reduce consumer prices without causing a recession. Although the official forecasts for this year’s growth were revised downward by Powell and Co., Powell and Co. are confident they can achieve a “soft landing” despite outside factors making it more difficult. All major institutions warned that there is a greater chance of a US recession as the Fed focuses more on price control, which raises doubts about their outlook. To reflect this, the Fed amended a small portion of its statement. It replaced the phrase “the Committee expects inflation to return to its 2 % objective and the labor force to continue strong” with “the Committee strongly committed to returning inflation back to its 2 % objective”.

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Fed watchers such as Tim Duy from SGH Macro have suggested that this is an admission by the Fed that its mandate (to achieve maximum employment and price stability in the near future) is not being fulfilled. Economic predictions show that policymakers expect rates to rise above the neutral rate of 2.5 percent and even into the restrictive zone. The Fed raised the Federal Funds Rate target last week by 75 basis points. The traders will be interested in the extent of July’s rate hike. According to the revised projections, rates will rise to 3.25 to 3.50% by the end of the year.

This could mean a 75 basis-point rate hike in July followed by a 50 basis-point hike in September and then a 25 base-point increase at its meetings in November or December. However, it could also be read as three 50-basis point rate increases followed immediately by a 25-basis point move. Powell is likely to say that July’s rate decision will be affected by incoming inflation data. Some are leaning towards this option, even though Powell said that 75bps rate increases were not common and that it was more likely to see moves of 50bps or 75bps in July.

Barclays analysts, who were the first major bank to call out a 75bps rate hike in June, said that it was a strong move from the central bank. They called it a “statement increase” but predicted that the FOMC would move to a 50bps rate rise at its July meeting due to the current difficult economic conditions, especially in the housing sector.

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