Elevate Inflation Data May Upend the Fed's Narrative of Restrictive Rates

Alexander Garcia
11 Jun, 2024
Miami

Stocks lacked direction as the Federal Reserve policymakers kicked off a two-day meeting. 

Stocks were in a holding pattern in early trading on Tuesday as investors awaited rate decisions and consumer price inflation data on Wednesday. 

The S&P 500 index and the Nasdaq Composite lacked direction, and investors looked forward to the release of the Fed's monetary policy decision on Wednesday. 

The Federal Reserve is widely anticipated to hold the Fed Funds rate range between 5.25% and 5.50% after the two-day policy meeting that starts today. 

Investors are hoping that in the subsequent press conference, Fed Chairman Jerome Powell's comments and answers may provide deeper insights into future rate paths and possible rate cut timing. 

Investors have lowered rate cut expectations to only one cut at the end of the September meeting, from the expectations of four rate cuts at the start of the year. 

The Federal Reserve has raised rates eleven times in 2022 and 2023, but inflation has still remained above the Fed's target rate of 2%. 

The Fed's rate hikes have clearly not slowed the economy; labor market conditions are moderating but still tight, and wages are still rising at a significantly faster rate of 4%. 

Fed policymakers talk tough, but when it comes to fighting inflation, they take a softer and slower approach. 

While policymakers are promoting the Fed's goal of price stability in public discourse, over the last four years, home prices have surged more than 100% in the fifty largest metropolitan areas, food prices have more than doubled, and the cost of most services is running ahead by 50% or more. 

The Federal Reserve has no plans to bring down these skyrocketing prices of shelter and food, which have severely hit the hard-earned pockets of most families. 

The Federal Reserve needs better and more advanced tools than a mere change in interest rate to tackle inflation, which was created in the first place by the central bank's reckless money printing during the COVID-19 pandemic. 

 

U.S. Indexes and Treasury Yields

The S&P 500 index decreased 0.2% to 5,352.22, and the Nasdaq Composite rose 0.2% to 17,240.55.

The yield on 2-year Treasury notes edged lower to 4.85%, 10-year Treasury notes decreased to 4.44%, and 30-year Treasury bonds edged higher to 4.58%.

WTI crude oil increased $0.40 to $78.14 a barrel, and natural gas prices rose 16 cents to $3.07 a thermal unit.

Gold increased by $1.04 to $2,310.94 an ounce, and silver was down 55 cents to $29.16. 

The dollar index, which weighs the U.S. currency against a basket of foreign currencies, edged lower to 105.30.

 

U.S. Stock Movers

General Motors jumped 1.4% to $48.34 after the company's board authorized a $6 billion stock repurchase plan. 

Eli Lilly jumped 2.4% to $887.0 after a panel of FDA advisors recommended the approval of the company's drug to treat Alzheimer, donanemab. 

Oracle Corp. declined 1.2% to $124.12 ahead of the software and database developer's quarterly results after the close of regular trading. 

DXC Technology jumped 2.3% to $18.88 on a report that Apollo Global and Kyndryl Holdings are nearing a bid between $22 and $25 a share for the company. 

The news was first reported by Reuters and could not be independently verified. 

Cognizant traded down 1% to $66.25, and the company agreed to acquire Cincinnati-based Belcan for $1.3 billion in cash and stock. 

 

European Markets Drop for the Second Day Amid Growing Political Turmoil in France and Germany 

Rising political uncertainty and France's snap election announcement added to market anxieties in European trading. 

Benchmark indexes in Paris, London, and Frankfurt declined for the second day in a row and extended 2-day losses to nearly 2%. 

Far-right parties showed significant gains in the European Union parliament election, but leading mainstream parties retained the dominant position in this Sunday's election. 

However, extreme right-wing parties in Germany, Austria, and France won a significant proportion of votes, signaling voter displeasure with the established parties. 

The protest votes were largely about the failure of the governments in Germany and France to tackle economic stagnation, ineffective policies to stem rising immigration, and the high cost of living. 

In a surprise move, French President Emmanuel Macron announced the dissolution of the parliament after the far-right National Rally Party won more than 30% of votes, twice as many as Macron's Renaissance Party. 

President Macron's move is widely seen in French political circles as a risky gamble that could lead to a shift of power in parliament and significantly hinder the domestic economic and political agenda. 

France will hold two-round national assembly elections on June 30 and July 7, just weeks before the start of the Olympic Games in Paris. 

The French government's bond yield jumped to a 20224's high of 3.30% amid rising uncertainty. 

 

Europe Indexes and Yields

The DAX index decreased by 0.7% to 18,369.94; the CAC-40 index fell by 1.3% to 7,789.21; and the FTSE 100 index declined by 0.95% to 8,147.81. 

The yield on 10-year German bonds edged higher to 2.66%. French bonds inched higher to 3.30%; the UK gilts edged lower to 4.29%; and Italian bonds inched higher to 4.13%.

The euro edged higher to $1.074; the British pound inched higher to $1.274; and the U.S. dollar weakened to 89.65 Swiss cents.

Brent crude decreased $0.37 to $82.01 a barrel, and the Dutch TTF natural gas fell by €0.21 to €34.21 per MWh.

 

Europe Stock Movers

Rio Tinto declined 2.5% to 5,223.0 pence after the Anglo-Australian mining company agreed to acquire Mitsubishi Corp.'s 11.65% stake in Boyne Smelters for an undisclosed amount. 

Societe Generale declined 2.9% to €23.39 on reports that the French lender is struggling to sell its securities services unit. 

Senior plc gained 1.1% to 160.0 pence after the maker of high-tech components for aerospace and defense equipment received several orders from Collins Aerospace. 

FirstGroup rose 1.1% to 169.90 pence after the private railroad and bus service operator reported a decline in annual revenue. 

Revenue in the fiscal year 2024 ending in March declined to £4.71 billion from £4.76 billion, adjusted operating profit rose to £202.4 million from £154.0 million, and adjusted earnings per share rose to 16.4 pence from 10.7 pence a year ago. 

The increase in adjusted operating profit was driven by one extra week of trading and higher accrued variable fees in Frist Rail. 

The company reiterated its fiscal year 2025 outlook and confirmed its plans to complete the share buyback before financing any new growth initiatives. 

Atos SE decreased 11.4% to €1.01 after the French information technology company selected a financial restructuring proposal led by Onepoint, Butler Industries, and Econocom. 

 

Yen Approached Recent Low and JGB Yield Rebounded Above 1% Ahead of BoJ's Rate Decisions 

Benchmark indexes in Tokyo extended gains for the second day in a row, tracking gains in tech stocks in overnight trading in New York. 

The Nikkei 225 and the Topix indexes diverged in lackluster trading, and tech stocks powered the market advance in Tuesday's trading. 

The yen weakened to 157.25 against the U.S. dollar, and the yield on a 10-year Japanese government bond rebouned to 1.02% ahead of the Bank of Japan's monetary policy decisions on Thursday. 

The BoJ is widely expected to hold rates steady and continue its purchase of Japanese government bonds, fueling another leg down in the yen. 

The U.S. Federal Reserve is expected to hold its interest rate range steady between 5.25% and 5.50%, and the central bank is also likely to cool down rate expectations further. 

The wide yield differential between the U.S. and Japan is likely to persist as the Bank of Japan shows no interest in lifting near-zero rates, despite the cost of rising imports. 

The persistent yield gap is also putting additional pressure on the yen, and currency traders are bracing for the price to range between 165 and 170 before the year's end. 

 

Japan Stock Movers 

The Nikkei 225 Stock Average increased 0.2% to 39,098.62, and the Topix index fell 0.2% to 2,776.43. 

Tech stocks led the gainers for the second day in a row, and Tokyo Electron, Advantest, Screen Holdings, and Socionext gained between 0.3% and 1.2%. 

However, Softbank bucked the trend and edged lower by 0.6% to ¥9,666.0. 

Automotive stocks lacked direction after investors looked for bargains in the beaten-down sector after a certification scandal engulfed the vehicle makers. 

Toyota Motor decreased 0.5% to ¥3,254.0, Honda Motor was unchanged at ¥1,708.0, and Nissan Motor edged up 0.05% to ¥545.40. 

Banks were in focus in active trading ahead of the Bank of Japan's rate decisions on Thursday. 

Mitsubishi UFJ decreased 1.0.2% to ¥1,632.50, Sumitomo Mitsui declined 0.8% to ¥10,280.0, and Mizuho Financial fell 0.2% to ¥3,141.0. 

Taiyo Yuden Company, the materials and electronics engineering company, advanced 3.3% to ¥3,576.0, and Ebara, the maker of turbines and pumps, increased 3.4% to ¥12,165.0. 

Eisai Company decreased 3.3% to ¥6,649.0. 

 

China Indexes Extended Downward Trend Ahead of Inflation Data 

Market indexes in Shanghai and Hong Kong traded lower as investors set aside rate-cut expectations in the U.S. and China. 

The CSI 300 and the Hang Seng indexes declined and trimmed this year's gains after property market worries and an uneven economic rebound overwhelmed market sentiment. 

The Hang Seng index has dropped 8% from its high in May after China's weak import growth suggested weak domestic demand, and the weakness in manufacturing sector growth also contributed to market nervousness. 

China is set to announce its inflation data on Wednesday, and economists are anticipating a slight pick-up in inflation, and consumer price inflation in May is likely to accelerate to an annual pace of 0.4% from the 0.3% pace in April. 

The U.S. is also set to announce its inflation update on Wednesday, followed by the Federal Reserve releasing its monetary policy decisions and economic projections. 

The Federal Reserve is expected to hold steady its interest rate range between 5.25% and 5.50% and provide insights into the possible rate cut later in the year. 

Investors have lowered their rate-cut expectations to one from as high as four earlier in the year. 

 

China Stock Movers 

The CSI 300 index declined 1.1% to 3,533.97, and the Hang Seng index dropped 1.7% to 18,056.13. 

Li Auto declined 4% to HK$74.90, BYD increased 2% to $229.20, and Nio decreased 3.4% to $36.95. 

The Bank of China declined 2.7% to HK$3.71, and the and the Industrial and Commercial Bank of China decreased 1.5% to HK$4.35.

Gold mining and jewelry retailers traded down after the People's Bank of China halted its 18-month-long steady purchase of gold. 

Zijin Mining Group declined 4.5% to HK$16.66, and Chow Tai Fook Jewellery Group fell 3.5% to HK$9.41.