Easing US inflation pressure gives the Fed room to skip a rate hike

A report showing an unexpectedly large drop in the inflation rate sparked a broad rally Tuesday and raised hopes the Federal Reserve will leave its benchmark interest rate unchanged at the conclusion of its June meeting later today.  With Tuesday’s gains, the S&P 500 Index and Nasdaq Composite are at 14-month highs, while the Dow Jones Industrial Average is at a five-month high.  Yesterday’s rally was more broad-based, which could signal an attempt by the market to extend what started to look like a breakout last week for the ‘unloved’ parts of the market this year, such as small-caps and cyclical.  Elsewhere, European equities held onto early gains yesterday, with the Euro Stoxx 50 rising by 0.7%, helped by a rise in tech shares. 

Summary for 14.06.2023 

• Asian equity markets were mixed on Wednesday as investors geared up for the Federal Reserve’s policy decision, where it is expected to pause its interest rate hikes following the release of softer-than-expected US inflation data.  Still, markets remain cautious as Fed Chair Jerome Powell could issue hawkish forward guidance after the announcement due to upside risks to inflation.  Shares in Australia, Japan and mainland China advanced, while South Korean and Hong Kong shares declined. 
• European and US equity futures were pointing to a flat start early on Wednesday ahead of the Fed’s rate decision.  
• Oil prices crept lower this morning after a strong rally in the prior session as markets hunkered down ahead of the closely watched Federal Reserve interest rate decision, while industry data pointed to a build in US inventories.  Data from the American Petroleum Institute showed that crude inventories unexpectedly grew by about 1 million barrels in the week to June 9, heralding a similar reading from government data due later in the day. 

• Federal Reserve policymakers are poised to pause their hiking of interest rates for the first time in 15 months while retaining a tightening bias that signals a possible resumption of moves as soon as next month.  Powell had signalled that Fed leaders would prefer to wait to evaluate the impact of past increases on the economy as well as of recent banking failures on credit conditions. 
• The Consumer Price Inflation (CPI) in the United States rose 0.1% in May from the month before.  Economists had expected CPI to have risen 0.2%.  The 0.4% increase in the core rate met expectations.  On an annual basis, CPI was up 4% from a year earlier, making May the smallest year-over-year gain since March 2021.  That means the headline rate has fallen by more than half from its peak of 9.1% in June 2022. 
• The British economy expanded 0.2% month-over-month in April, rebounding from a 0.3% drop in March, and in line with expectations.  The services sector was the main contributor to the growth, led by wholesale and retail trade and repair of motor vehicles and motorcycles while manufacturing and construction shrank. 
• The ZEW Indicator of Economic Sentiment for Germany rose to -8.5 in June from the previous month’s reading of -10.7 and above market expectations of -13.1. However, the index remained in negative territory, indicating that financial markets do not foresee an improvement in the economic situation during the second half of the year, with sectors focused on exports expected to face challenges due to a weakened global economy. Nevertheless, the current recession is generally not viewed as excessively concerning. 
• President Vladimir Putin acknowledged that Russian forces fighting in Ukraine lack sufficient advanced weapons despite a tripling of arms output, as Kyiv’s forces pressed a counteroffensive backed by a new infusion of allied support. Putin made the rare admission of shortcomings in production in a televised meeting with local reporters and war bloggers. He also said Russia had lost 54 tanks since Ukraine’s drive began last week — the first time the Kremlin has admitted losses on such a scale.