The dollar snapped a small three-day losing streak after Fed Chair Powell stated some transitory factors may be at work in inflation and that it will pick up. Inflation is well below the Fed’s 2% target, but the data-dependant Fed seems certain that is temporary. That was an aggressive call, that pretty much put rate cut bets on ice. The recent high-beta rally appears on hold for now, but that could change if we see further economic growth momentum from the eurozone.
USD – Falls on FOMC statement, rebounds on Powell presser
ISM – Past weakness below 50 has foreshadowed rate cuts
Oil – Softer on rising US stockpiles and higher production from OPEC
Gold – Sinks on Fed’s Patience on rate cuts
Volatility – Hedge funds get squeezed
The markets expectations going into the FOMC decision was leaning for a dovish non-event. The Fed’s statement went pretty much as planned, with some being surprised by the technical adjustment that lowered the rate on one of the tools (IOER) it uses to help control its benchmark. The press conference delivered a clear message that rate cuts are not happening anytime soon as inflation should pick up. The expectations for healthier growth later in the year however suggest the downside risks are fading. If we see this patient period end with stronger momentum, the Fed may need to reconsider tightening if we do see that pickup with inflation.
The closely watched ISM Manufacturing data delivered further support for the doves after falling to the lowest level since the fourth quarter in 2016. The headline manufacturing number of 52.8 was much softer than the 55.0 analysts’ forecast and the prior 52.4 reading. The dollar weakened and Treasuries rose following the disconcerting release.
Many analysts are highlighting the recent history of rate cuts that occurred in 1995, 1996, and 1998, all of which occurred after ISM declined toward or below the 50 level. The comparisons to 1995-1996 period are similar to present day. In the 90s the Fed delivered a reversal in policy with a rate cut after a string of rate hikes. Eventually in 1998, the Fed cut rates three more times. The similarities between now and 25 years ago were slower global growth and along a strong labor market in the US.
Oil got hit with a double dose of bearish drivers; OPEC pumped out 25,000 more barrels a day in April than in March and US stockpiles rose to the highest level since September 2017. The narrative is slowly changing for oil, as the markets are no longer emphasizing the rebalancing of the oil market from the OPEC + production cuts, but instead are focused on the rising record production levels from the US and inevitable surge in Russian production. Political risks from Venezuela and the Iranian sanction aftermath are bullish catalysts but once those stories settle, it appears oil could continue a soft tone until we see a strong global rebound that will support the demand side argument.
The yellow metal had a rollercoaster move following the FOMC decision and press conference. Immediately following the dovish statement, the yellow metal targeted last week’s high, but that move quickly reversed following Powell’s inflation is low due to transitory factors and that it will pick up. The Fed fund futures market might not be saying it yet, but rate cut bets should be falling off the table and gold prices could come further under pressure if we see inflation rise on next Friday.
Hedge funds last week signaled the largest position of short VIX futures contracts. While recent history has seen a history of bearish trend remaining in place when short positions are extreme, that may not be happening here. VIX futures rose 12.8% today to $14.80 as a Fed induced risk averse move saw investors sell risk assets and high-beta currencies. With earnings season providing a very mixed batch of results and outlooks, we could see further pressure in the short-term for US stocks and that could be a bullish catalyst for the VIX.
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