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For the global financial market, which US macro risk event has the greatest impact on short-term market trends?

Some people may think that the impact is more obvious, while others may answer that it is the relatively more unpredictable US CPI. But it doesn't matter, no matter which of the above answers is, people will face these two "eyes of the storm" tonight: because this time, the two will be released on the same day, which is extremely rare!

Historically, both CPI reports and Fed policy decisions have often stirred market turmoil on the day of their release, but these two events rarely happen on the same day. According to Dow Jones Market Data, since 2008, there have been only 13 times in the 16-year period when CPI reports and Fed policy decisions were released on the same day.

There is no doubt that Wall Street traders are now clearly making full preparations for this rare big day. Even traders in the Asia-Pacific region, who are far away across the ocean, dare not be careless tonight, and some are even ready to stay up all night.

Motonari Sakai, head of the foreign exchange and financial products trading department at Mitsubishi UFJ Trust Bank, has already prepared for tonight. Sakai said, "I have no dinner plans and I plan to avoid drinking at home so that I can concentrate on watching the US CPI release, and then I may stay up all night waiting for the Fed's decision to be announced in the early morning."

According to the schedule, the U.S. Department of Labor is scheduled to release the May CPI data at 20:30 Beijing time tonight; the Federal Reserve will announce the June interest rate decision at 2 a.m. Beijing time on Thursday, and Chairman Powell will hold a press conference half an hour later (2:30) as usual. For the global market, in these six hours, whether it is the stock market, bond market, foreign exchange market or commodity market, it is very likely to face several waves of fierce market trends...

Appetizer for interest rate meeting night: US May CPI

Since the Fed's decision is still behind, the short-term market trend triggered by tonight's CPI data is likely to be short-lived. However, this does not mean that tonight's inflation data is not important. In fact, the quality of CPI is likely to set a tone for tonight's market at the first time, and affect people's prediction of the Fed's hawkish and dovish attitude, and even the distribution of the Fed's dot plot may be affected.

Nick Timiraos, a well-known reporter for the Wall Street Journal and known as the "New Fed News Agency," said that although most of the groundwork for the Fed meeting was done in advance in the days and weeks before the meeting, there will be a variable on Wednesday, and the dot plot interest rate forecast may be revised based on the Labor Department's May CPI inflation data. If the inflation report is disappointing, more officials may stick to the forecast of no more than one rate cut this year. If the inflation report is mild, more officials may make a forecast of two rate cuts.

So, what are the market’s expectations for CPI tonight?

According to media surveys of economists, the year-on-year increase in the overall CPI in the United States in May is expected to remain at 3.4%. However, the month-on-month data may be good news - the month-on-month increase in CPI last month is expected to be only 0.1%, a significant drop from the month-on-month increase of 0.3% in April. If the final data meets expectations, this will also be the smallest month-on-month increase in CPI since October 2023.

In terms of core CPI, the year-on-year growth rate of core CPI in May is expected to fall back to 3.5%, from the previous value of 3.6%; the month-on-month growth rate is expected to remain the same as the previous month, at 0.3%.

The following is the forecast distribution of Wall Street banks for tonight's CPI data compiled by Nick Timiraos:

According to Dow Jones Market Data, in the five CPI release days so far this year, the S&P 500 and Nasdaq have risen or fallen by about 1% four times. Therefore, it is obvious that we need to be careful about the risk of a sharp opening higher or lower in the US stock market tonight.

Regarding the specific impact of CPI data on the trend of US stocks tonight, we have actually introduced JPMorgan Chase's four scenario forecasts in previous reports. Interested investors can review them for reference.

Of course, as shown in the figure below, Goldman Sachs also has similar predictions, and investors can compare them with each other.

Investors should be reminded that both JPMorgan and Goldman Sachs mainly refer to the core CPI month-on-month indicator for their estimates of tonight's CPI.

As JPMorgan wrote in a report to clients on Monday, since the CPI report and the Fed's decision will be released on the same day, Powell's press conference may still reverse the CPI results. Therefore, tonight's CPI data is ultimately just an "appetizer" - the final word may be left in the early hours of Thursday Beijing time.

What are the highlights of the Federal Reserve’s decision tonight?

Currently, it is widely expected that the Federal Reserve will maintain the target range of the federal funds rate at 5.25%-5.5% after the two-day interest rate meeting ends at 2 a.m. Beijing time on Thursday, but economists will pay close attention to clues about the timing of the central bank's first rate cut in four years.

The Fed has kept its benchmark interest rate at this more than 20-year high since July last year. Powell has insisted in recent months that this interest rate level can push inflation down enough to slow demand, but it still needs to maintain a relatively tight policy for a longer period of time to ensure that inflation cools down.

This means that the U.S. Federal Reserve Open Market Committee (FOMC) may make its first rate cut at one of the last three interest rate meetings of this year in September, November or December, or there is a small probability that it may have to wait until 2025. All market participants will look for answers in the Fed's policy statement, the latest quarterly economic forecasts, interest rate dot plots, and Powell's press conference...

The following is our forward-looking analysis of the specific points of tonight’s Fed decision:

①Will there be major changes in the Fed’s policy statement?

The Federal Open Market Committee is almost certain to retain its interest rate guidance in its post-meeting policy statement, saying it will not cut rates until it has more confidence that inflation is moving sustainably toward its 2% target.

In its May statement, the FOMC said that "there has been a lack of further progress in recent months toward the Committee's 2% inflation objective." Some institutions, including Goldman Sachs, have expected the Fed to delete or modify this wording. Keeping this statement may be interpreted as a hawkish attitude, because the April inflation data released since the May policy meeting showed that the inflation rate has eased from the previous three months.

Of course, the good or bad CPI tonight is expected to have a key impact on whether or not to delete this wording.

Among the officials attending the meeting, St. Louis Fed President Musalem, who took office in April (no vote this year), will submit his quarterly forecast for the first time at this week's meeting. At the same time, this is also the last interest rate meeting attended by Cleveland Fed President Mester (a voter this year), who will step down after her term expires at the end of June.

②Will Federal Reserve officials consider one or two rate cuts this year?

In their dot plot in March, Fed officials believed that three rate cuts might be the best policy option through 2024. But with inflation data continuing to be sticky, most economists now believe the Fed will only forecast one or two rate cuts.

Therefore, a big part of the market tonight will focus on the new quarterly rate forecasts, the so-called interest rate "dot plot." In March, most officials expected two or three rate cuts this year; the median (or midpoint) of the 19 officials' expectations was three, but in fact, if there is only one "dot" that affects the median, the dot plot's annual rate cut estimate will be reduced to two.

Many Wall Street people said that whether the dot plot shows one or two rate cuts this year is expected to directly affect whether the first rate cut can be achieved in September. If the median forecast is two rate cuts this year, then the hope that September will become the first rate cut window will increase greatly. If the median forecast is only one rate cut, it means that rate cuts may begin later this year.

“That would be seen as a pretty strong signal,” said Jan Hatzius, chief economist at Goldman Sachs.

Pollick of Canadian Imperial Bank of Commerce also said that if the Fed plans to cut interest rates twice, it will be considered an accommodative policy stance. This will indicate that interest rates may be cut in September this year, before the US presidential election. Many economists believe that the Fed will predict two interest rate cuts this year, which will give them flexibility. If the interest rate is cut only once, it means that the Fed's policy stance is more neutral or hawkish.

In addition to several rate cuts this year, the focus of some industry insiders may have gradually shifted to next year. "We will quickly turn the page to 2025," said Kevin Flanagan, head of fixed income strategy at WisdomTree. "Maybe we will have one or two rate cuts this year, but how many will we have next year? This will quickly become the center of attention as we are about to enter the second half of this year."

In the March dot plot, the Fed's median forecast for policy rates in 2025 and 2026 was 3.9% and 3.1%, and the median forecast for long-term interest rates was raised from 2.5% to 2.6%.

The following figure is Goldman Sachs's estimate of the changes in the dot plot tonight. Overall, Goldman Sachs, like most Wall Street people, expects that the median of the June dot plot will show two rate cuts to 4.875% in 2024 (the March dot plot showed three rate cuts), four rate cuts to 3.875% in 2025 (the March dot plot showed three rate cuts, but the total rate cuts for two years remained unchanged), and three rate cuts to 3.125% in 2026 (unchanged).

③Will there be more signs of no interest rate cuts or interest rate hikes within the year?

Whether the rate is cut once or twice this year, although the degree of hawkishness and dovishness varies, it is actually within the acceptable range of current market participants. However, some industry insiders are more concerned about whether the Fed's decision tonight will still have some "traces left" by extreme hawks?

(Wall Street's forecast for the number of rate cuts and the first cut window this year, a few investment banks still expect no rate cuts this year)

Some industry organizations are currently worried about whether there will be more points in the dot plot tonight that support not cutting interest rates this year. If many Fed officials choose to do so, then the general view of economists that the Fed is still inclined to cut interest rates this year may be questioned.

Yelena Shulyatyeva, an economist at BNP Paribas, expects three Fed officials to signal no rate cuts. She expects six officials to signal one cut and 10 officials to signal two cuts.

However, Ryan Sweet, chief U.S. economist at Oxford Economics, thinks it is unlikely that officials will signal no rate cuts. “I don’t think their attitude will change that much,” he said in an interview.

In addition, the minutes of the Fed's last meeting in early May showed that many officials mentioned that they were ready to raise interest rates again when "inflation risks become a reality and it is appropriate to take action." This is inconsistent with Powell's statement at the time that it was unlikely to raise interest rates. At tonight's press conference, many industry insiders may also pay attention to Powell's latest statement.

“Powell is likely to keep the bar for rate hikes pretty high, which is a low-probability event,” said Michael Gapen, head of U.S. economics at Bank of America Securities.

Thomas Hoenig, former president of the Kansas City Fed, said in a recent interview that raising interest rates would be too risky and would make the market volatile. "As far as I know, not many FOMC members want to raise interest rates. As long as inflation does not rise, the Fed will wait and see."

④How does Powell view the latest trends in US employment and inflation?

The Fed Chairman will certainly be asked about his views on the latest developments in U.S. employment and inflation during his answer session tonight.

“People might ask him what he thinks about the recent softening in the economy,” said Stephanie Roth, chief economist at Wolfe Research. “He’ll probably say they’re monitoring it, and that the consumer seems to be doing OK so far — maybe there are some cracks showing up at the low end of the market — but that’s something they’re watching closely.”

"New Fed News Service" Nick Timiraos said that Fed officials are struggling to find a balance this year. On the one hand, there are growing signs that the severe shortages and imbalances in the labor market over the past three years have been resolved without being accompanied by a significant rise in unemployment, raising the question of whether the labor market will soften at the margins . But despite this, economic activity has been solid. A steady decline in inflation in the second half of last year has stalled this year, leaving officials less confident that the downward trend will continue.

In the view of TD Securities strategists Oscar Munoz and Gennadiy Goldberg, given the recent changes in data, Powell is likely to appear somewhat optimistic, especially if the May CPI shows further progress in the decline in inflation.

In their latest quarterly forecasts, Fed policymakers are likely to raise their 2024 inflation forecasts to reflect higher-than-expected inflation data in the first quarter, according to industry surveys. They are also likely to raise their unemployment forecasts as the monthly report released last Friday showed the unemployment rate climbed to 4% in May, the highest level in more than two years.

Is “Super Wednesday” worth looking forward to for the market?

Stuart Kaiser, head of U.S. equity trading strategy at Citigroup, said the options market is currently betting that the S&P 500 will move 1.25% in either direction that day, based on the cost of at-the-money puts and calls. Kaiser said that over the past year, the pricing of CPI and Fed daily increases has been similar, averaging 0.75%, so the combination of the two makes it a bigger event and adds uncertainty.

An interesting historical statistic is that although the sample size of the Federal Reserve's interest rate meeting day "encounters" the CPI release day is very small, according to Dow Jones market data, the three major U.S. stock indices tend to rise on these days - in these 13 times, the S&P 500 index rose an average of 0.7%, the Dow Jones Industrial Average rose an average of 0.9%, and the Nasdaq Composite Index rose an average of more than 1%.

A survey conducted by 22V Research earlier this week also showed that most investors surveyed are betting that both CPI and the Federal Reserve's decision tonight will trigger "risk on" (Risk On).

Of course, some market participants currently believe that although Wednesday is a rare big day, the volatility of U.S. stocks is not expected to be much greater than usual.

Dave Sekera, chief U.S. market strategist at Morningstar Research Services, said that if Fed Chairman Powell "makes some unexpected remarks" at the Fed's post-meeting press conference, then market volatility on Wednesday would increase. But I think the possibility of this is very low because he (Powell) always chooses his words very carefully when making comments.

Meanwhile, if the CPI data is in line with or better than expected, it could bring some positive market sentiment, but given the current high valuations of U.S. stocks, Sekera and his team see "little upside in the short term" for U.S. stocks. On the other hand, Sekera said that if inflation indicators are much higher than expected, it could cause U.S. stocks to fall, but the extent of the decline will also depend on how much higher the inflation rate is than average expectations.

According to Dow Jones Market Data, the S&P 500 has risen an average of only 0.1% on the three Fed decision days this year, while the Dow and Nasdaq have both fallen an average of around 0.4%.