Market 06/12: June FOMC pessimistic in economic forecasts

FOMC June/2024: Fed more pessimistic in economic forecasts

Interest rate-monetary policy: pushing back rate cut plans

• As the market expected, Fed keeps current interest rate at 5.25 - 5.55

• Dot-plot shows Fed quite hawkish for this year:

  • indicating a cut of only -25bps this year (compared to -75bps in March)…

  • while expecting stronger cuts for 2025: -100bps on average (compared to -75bps in March)

    => Fed pushing back rate cut plans to 2025

  

Macroeconomic projections: raising PCE inflation forecasts for next 3 years and unemployment rate for 2025-2026

• Keeping GDP growth projection at 2.1% for 2024 as in March

• Keeping unemployment projection at 4% for 2024 - but raising unemployment rate forecast to 4.2% for 2025 and 4.1% for 2026.

  => Fed thinks labor market will worsen next year?

• Raising PCE inflation projections for both 2024 and 2025

  => Fed not confident in disinflation progress!

  

In addition, FOMC Statement emphasizes: inflation only declining at a modest pace in recent months!

CPI lower than forecast: creates premise for Fed rate cut in September

CPI lower than forecast - no increase from previous month (~0% m/m)

• May headline CPI rises +3.3% YoY (< estimate and previous 3.4%).

• Core CPI rises +3.4% YoY (< estimate 3.5%, previous 3.6%).

→ Overall, positive signal for Fed as both headline and core CPI heading toward 2% target.

By month:

• Headline CPI: +0.01% MoM (< forecast: +0.1% m/m | previous month +0.3% m/m) - lowest since April 2021.

• Core CPI: +0.16% MoM (< previous month & expected +0.3%).

• Core CPI growth over 3 months down to +3.3% (annual average)

  • … confirms the disinflation trend is still ongoing.

Energy prices lead CPI decline trend

• CPI down due to prices energy (red column) and core goods (purple column) decline.

• Core services also has the lowest growth since September 2021.

• Food prices remain high, however growth rate has eased slightly to +2.1% YoY.

• Shelter prices (largest weight in CPI services) up +5.4% YoY, accounting for more than 2/3 of total annual increase in items (ex food and energy.

  • MoM, shelter prices up +0.4% MoM, offsetting gasoline decline.

First time Supercore CPI declines (m/m growth negative) due to auto insurance costs decline

• Supercore CPI down -0.04% MoM — first decline vs previous month in 3 years.

• … mainly due to auto insurance dropping sharply to -0.1% MoM (previously 1.8% m/m) - first negative since 2021.

• However, YoY, auto insurance remains the strongest increasing component in CPI basket.

Market reaction: ~73% probability Fed cuts in September

• Traders raise probability of Fed rate cut in September to ~73% right after CPI report.

  

• Market bets Fed will cut at least 2 times this year.

• Stocks green after CPI report.

• Bond yields plunge across the board.

EIA weekly oil inventories surge

API report:

• Crude -2.4 million

• Cushing -1.94 million

• Gasoline -2.55 million

• Distillates +972,000

DOE report:

• Crude +3.73 million

• Cushing -1.59 million

• Gasoline +2.57 million

• Distillates +881,000

• Biden administration continues to add 339,000 barrels of oil to Strategic Petroleum Reserve (SPR) - lowest since Dec 2023.

• Crude oil imports hit 6-year high.

Oracle ER: Partnership with ChatGPT and Google Cloud

• Revenue: up +3% YoY, to 14.3 billion USD (below estimates by 0.3 billion USD).

• Non-GAAP EPS: 1.63 USD (below estimates by 0.02 USD).

• Dividend (unchanged): 0.4 USD.

• Cloud revenue: up +20% YoY, to 5.3 billion USD.

• SaaS: up +10% YoY, to 3.3 billion USD.

• IaaS: up +42% YoY, to 2.0 billion USD.

• Oracle announces partnership with OpenAI and Google Cloud to boost cloud growth.

Crypto market: Brazil's largest bank launches crypto trading service

1. Donald Trump says he wants all remaining Bitcoin to be mined in the US

2. Brazil's largest bank has launched crypto trading service for all 60 million users.

Some other news

1. Shocking data: 42% small-cap companies are losing money - the highest number since the Covid period.

   • The Russell 2000 index measuring the performance of 2,000 small-cap companies is also trading ~21% below its peak

     → High interest rates are putting pressure on small-cap companies.

2. Apple surpasses Microsoft to become the company with the largest market cap.

3. Citron Research announces it has stopped shorting GameStop because the company has cash reserves of up to 4 billion USD.

4. Global container shipping rates continue to rise sharply this week, up more than 181% than the same period last year.

5. China: PBOC supports state-owned enterprises in buying existing homes at reasonable prices to reduce housing inventory and boost the real estate market.