Markets moved higher last week in spite of the “hawkish pause.”
Markets had largely anticipated the “pause” or “skip” in rate hikes last week. However, the Fed threw investors a curve ball by raising the terminal fed funds rate from 5.1% to 5.6% - indicating two more rate hikes this year. While markets initially reacted negatively, the tide turned as investors began to doubt what is being termed the Fed’s “hawkish pause.” The Fed’s economic projections, also released with the FOMC’s rate decision, did not seem to make sense. While Fed increased their projections for GDP for 2023 and slightly for 2024, the Fed also increased their unemployment projection higher for 2024. The Fed’s blunders on inflation—dating back to 2021—are leaving the market doubtful that two more rate hikes are coming.
Meanwhile, both CPI and PPI for May were lower than expected last week and
the University of Michigan’s Inflation Expectation survey showed a considerable drop from 4.2% to 3.3%. In addition, Retail Sales for May grew 0.3% versus the –0.1% expected. The preliminary reading for the University of Michigan’s Consumer Sentiment Index for June was the highest in 4 months. If inflation continues to decline and rates remain stable, the consumer may have some runway left to keep spending strong in 2023.
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