Will the Fed reject the June interest rate cut?

In the US, inflation pressure has recently increased and remains high. Once again, services led the way, reflecting higher salary costs. The market valuation indicating the likelihood of the Fed's first rate cut in June has significantly decreased. The market is giving about 20 percent at the moment. chances of implementing such a scenario.

The dollar strengthened, Wall Street indexes lost a yields of American bonds increased dynamically, which caused 2-year-olds to "climb" to a level not seen since mid-November last year.

Numbers higher than expected

Yesterday's reading CPI for the United States, it was supposed to create more market volatility, and it did. US consumer prices increased by 0,4% in March. compared to the previous month, on an annual basis we received an increase of 3,2%. up to 3,5 percent Baseline measures discounting energy and food prices also came in at 0,4%. m/m. Compared to March 2023, we have an increase to 3,8%. These numbers were higher than expected and their interpretation was quite simple and clear. The market quickly revised the rating.

The Fed certainly pays a lot of attention to the underlying measures that are decisive for the basic trend. These signal that inflation pressure is increasing. In each of the last three months, the m/m dynamics amounted to 0,4%. , which means that during this period prices increased at an annual rate of 4,5%. – this is significantly higher than the Federal Reserve's target.

The increase is mainly due to the prices of basic services, including rents, whose increases were again high in March. Other services also increased, which is a result of the situation on the labor market, to be precise they result from the increase in wages.

Indices in a downward correction

High inflation readings in core and nominal terms will not go unnoticed by the US central bank. The Fed received a package of data that may cause greater uncertainty regarding the sustainable achievement of the inflation target. Let us recall that the Fed's latest March forecasts indicated that the personal consumption expenditure deflator (PCE index), to which the mentioned target refers, would amount to 2,4%. and 2,6 percent (base) on an annual basis.

The EUR/USD rate made a decisive downward move yesterday and reached the low level of last week (around 1,0730). The strength of the dollar caused temporary weakness gold. At one point the price was $2320 per ounce, but the price is now $20 higher. Wall Street stock indices are still in a downward correction phase. The Dow Jones has set new lows and is at its lowest level since mid-March. The size of the declines is moderate for now and does not yet send decisive signals of a trend change.

Source: Łukasz Zembik, OANDA TMS Brokers