This commentary follows the FOMC's update and are the opinions of TreasurySpring's capital markets expert, Nigel Owen, and Clearwater Analytics’ Head of Research Matthew Vegari. This does not constitute legal, investment, or other advice.
In the lead-up to this meeting we had the announcement of the Memorandum of Understanding between Iran and the US for a 60-day ceasefire to allow negotiations for an end to the war, and the immediate reopening of the Strait of Hormuz.
Inflation has leapt from 2.4% in February, to 3.2% in March, 3.8% in April and 4.2% in May (source: U.S. Bureau of Labor Statistics), while core inflation, excluding food and fuel costs has also reached 2.9%, undoing the drop we’d seen from September to February which had brought about expectations for rate cuts.
The core measure shows the conflict in Iran isn’t the only factor pushing prices higher, so the end of the war won’t see those price increases immediately reversed, especially when you consider that producer prices have risen by even more than consumer prices to date. They need to be passed on if companies aren’t going to eat into their margins.
There has been a real change in the shape of the dots between March and June. Not entirely surprising, given how things have developed in Iran in that period, as well as some of the economic data that's come out, but what surprised me most is that six of the 19 members polled think we'll need more than one 25 basis point hike before the end of the year, with one predicting 75bps!
Matthew wouldn’t be shocked if we see a hike by year end and I can definitely see how we get to that, but anything more would surprise me, and then I would expect rate cuts to start to resume again in 2027.
The market seems to have noted that shift in the dot plot and moved in that direction, but in a tempered manner, with a largely parallel shift in the curve by roughly 8bps.
Aggregating the data Clearwater Analytics has on treasurer behaviour, Matthew has seen a spike in clients terming their cash out for six months and beyond.
There was an initial surge back in March, it dipped in April, but then, as it seemed that monetary policy really was going to shift away from cuts, corporates seemingly have been trying to lock in more duration, lock in a little bit more yield, going 6 months, 12 months, and even sometimes up to two years.
To look forward from here, Matthew prepared this proprietary index, which shows the spike we’ve seen is matching a high last seen in 2021.
Matthew’s opinion is that this was a really broad-based approach, going farther out on the curve, and he expects this to start bending down now that the conflict has sight of a resolution and duration activity is probably going to start to throttle back.
Kevin Warsh has shown he will be his own man. No dot plot, a much shorter press conference, and a review of the central bank functions point to a man who won’t be swayed by political pressure as had been portrayed by some ahead of his appointment.
Before the meeting he was vocal that he wants fewer Fed members saying fewer words around rates and leaving markets to make up their own minds, rather than leading them as much as recent Fed Chairs have. So expect less guidance before July’s meeting.
From there, we believe it comes down to the dual mandate: the labour market is looking pretty solid, so they're going to be paying attention to the price of oil and the feed-through. If the MoU between the US and Iran holds and the Strait of Hormuz remains open, oil will likely trend down towards $70 a barrel, the economy will be able to absorb it, and the Fed won’t need to hike too much. But if the MoU doesn’t hold and we see oil back at $100, we believe the Fed will be more nervous about inflation pressures and hikes could be more severe.
*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.