S&P 500 — US Large Cap Index
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CAC 40 — French Market Index
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IPC Index — Mexico Market
BNY strategists John Velis and David Tam expect the Federal Reserve (Fed) to keep the federal funds rate unchanged at the upcoming July Federal Open Market Committee (FOMC) meeting, while stressing it is a close call. They highlight market pricing for at least one hike by September and see future moves driven by incoming US inflation data and Middle East-related energy shocks.
FOMC hold seen but risks remain
“We don’t expect a change to the federal funds rate this week, even though we acknowledge it’s finely balanced. If we’re right, hawkish dissents are likely; if the FOMC does tighten, expect a dissent or two in favor of holding.”
“Market expectations assign slightly more than a one-third chance of a hike this week. September pricing puts a hike at nearly three-in-four, and combined, July and September pricing suggests the Fed will hike at least once before then, with little expected beyond that.”
“Many market observers have commented that if the market is already primed for slightly higher rates by the beginning of the fall, the Fed should just go ahead and raise the policy rate this week. We don’t find this answer compelling and observe that implied rate hike probabilities can switch quickly. The geopolitical situation in the Middle East remains intractable and unpredictable, and with that uncertainty, energy prices and inflation expectations might adjust quickly.”
“With the recent resumption in Middle East hostilities, we expect many energy-related components to push higher, including those elements of supercore (like transportation) that are impacted by supply chain shocks. However, we see relief in many other categories not related to energy prices. Two more CPIs and two more PCE deflators will be published before September 16, and they are likely to move the needle definitively one way or the other. We think it prudent for the Fed to wait to see both the depth and breadth of renewed higher energy prices on the aggregate indices.”
“If we’re right and the Fed elects not to change rates, we’d expect the market reaction to depend on how such a hold is presented. Will it be a “hawkish hold” that leaves the market expecting September to be a sure thing, or will the Warsh Fed be reticent to hint at what’s coming? We think the latter, given the new Chair’s recent comments.”
