Choppy Trade Post-FOMC

MACRO FRAME

All central bank meetings this week produced a hold on policy, though the reaction to the Fed’s hold was the most substantial. Meanwhile, PCE data supports the case for no policy action in the near-term, while geopolitical risks overhang on market sentiment.

STOCK INDEX FUTURES

Equity index futures moved higher overnight following a raft of big tech earnings and a hawkish-hold from the Fed. Alphabet and Amazon impressed investors with results, but elevated capital spending targets from Meta and Microsoft worried investors. Today’s advance Q1 GDP showed the economy growing at a moderate 2% pace with private domestic demand running at 2.5%, while the PCE price index in the accounts jumped to a 4.5% annualized rate and core to 4.3%. The separate March income and outlays report confirmed firmer inflation, with headline PCE up 0.7% m/m and 3.5% y/y and core up 0.3% m/m and 3.2% y/y, alongside still‑solid real consumption and a low 3.6% saving rate. For the Fed, this mix of resilient growth and sticky price pressure argues against early easing and points toward a higher‑for‑longer policy stance unless subsequent data deliver a clear, persistent re‑acceleration in disinflation. Despite the overnight rally, the geopolitical bid continues to negatively impact overall sentiment, leaving room for a move to the downside, especially if oil prices reverse from their overnight lows.

The VIX is trading at 17.91, down 0.90 points (–4.8%) from Wednesday’s close of 18.81, reflecting a meaningful unwind of hedging demand as overnight mega-cap earnings have removed a key risk and the Fed’s hold yesterday came without hawkish surprises. The reading sits in the middle of the moderate 15–20 band, indicating renewed complacency and arguing against a near-term risk-off posture into the cash open.

The June S&P is trading at 7,200.75, up 0.46% from Wednesday’s settlement of 7,168.00, within an overnight range of 7,133.75 to 7,211.50. Near-term support is seen at 7,150 (round number / overnight open zone), then 7,133.75 (overnight low), with initial resistance at 7,211.50 (overnight high) and the 52-week high of 7,223.25 just 22 points above. SPX cash remains well above its 50-day moving average of 6,802.02 and above the 200-day at 6,720.48.

The June Nasdaq is trading at 27,502.00, up 0.65% from Wednesday’s settlement of 27,325.25, within an overnight range of 27,185.25 to 27,622.75 — a fresh 52-week high overnight on strong mega-cap tech earnings. Near-term support sits at 27,325.25 (prior settlement), then 27,207 (overnight open) and 27,185.25 (overnight low), with initial resistance at the 27,622.75 overnight/52-week high. NDX cash remains well above its 50-day moving average of 25,069.70 and above the 200-day at 24,776.89.

The June Dow is trading at 49,312, up 0.61% from Wednesday’s settlement of 49,012, within a wide overnight range of 48,608 to 49,407. Near-term support is seen at 49,012 (prior settlement), then 48,822 (overnight open) and 48,608 (overnight low), with initial resistance at 49,407 (overnight high), the 49,500 round number, the 50,000 psychological level, and the 52-week high of 50,937. DJIA cash remains above its 50-day moving average of 47,858.20 and above the 200-day at 47,153.80.

Watch point: Wednesday’s megacap earnings results were mixed, paired with a hawkish hold from the Fed and today’s GDP and inflation data, the case for a sustained pause in Fed policy seems clear.CURRENCY FUTURES

US DOLLAR: The USD index fell lower alongside a drop in oil prices as most risk-tied assets rallied overnight. Today’s GDP and PCE data saw the dollar move upwards from the 98.00 level, though lacked a substantial move the upside as the data supported the current narrative of a pause in rates. Ongoing geopolitical tensions and higher oil prices are likely to keep the dollar well-bid. Today’s risk-on rally is likely to cap a move to the upside absent any changes on the geopolitical front.

Underlying fundamentals make the case for a resumption of the dollar’s downward trend once hostilities between the US and Iran are officially over. Despite rising inflationary pressures driven by energy prices, the dollar has lost its interest rate differential support it once drew from hawkish Fed expectations, support that has since been repriced away.

Watch point: The dollar continues to find safe haven support and trade in line with oil prices. However, underlying macroeconomic fundamentals make the case for a resumption of the dollar’s downtrend when hostilities are over.

EURO: The euro is 0.15% stronger at $1.1693 following the European Central Bank’s decision to pause on rates. The bank signaled it has growing concerns over rising inflation, while also being concerned over downside risks to growth. Financial markets now see hikes in June and July, and are favorable to one more move in the autumn. The move to hold on rates comes after April inflation data showed prices in the eurozone rose 3.0% y/y, up from 2.6% in March. Energy prices rose 10.9%, the most since February 2023, driven by the Middle East conflict. Elsewhere GDP grew 0.1% in Q1, below forecasts of 0.2% as pressure from tighter energy supply weighed on the reading. For the ECB, monetary policy is well positioned to respond to upside risks to inflation and downside risks to growth. However, given market-pricing, it is evident that the favored policy action is a move upwards.

Watch point: The case for ECB tightening has grown, with markets now expecting nearly three rate hikes, though expectations of a third hike appear optimistic.

BRITISH POUND: Sterling is 0.28% higher at $1.3516 as most currencies advanced against the dollar, while the Bank of England left rates unchanged and maintained a cautious, wait-and-see approach. The Monetary Policy Committee’s nine members voted 8-1 to keep the BoE’s benchmark Bank Rate at 3.75%, with only Chief Economist Huw Pill seeking a hike to 4.0%. The voting split was a largely expected outcome, though a 9-0 move to hold rates could be taken as a dovish stance. For the BoE, incoming data will be crucial in determining if/when upwards policy action takes place. Persistent inflation, slowing wage growth, and slack in the labor market require a delicate balancing act from the bank. However, downside risks to growth and the labor market would appear to be of greater concern to policymakers, making it unlikely in our opinion that the bank will tighten rates meaningfully, if at all this year. Markets are currently pricing in two rate hikes from the BoE, and are favorable to a third hike in December.

Watch point: Policymakers are likely to monitor data on whether higher energy prices are leading to bigger wages demands, though downside risks to growth prevent a hurdle to policy tightening.

JAPANESE YEN: The yen strengthened 2.3% overnight to 156.75  yen per dollar following warnings from the Finance Minister that intervention in the currency market could be imminent.  Japanese Finance Minister Satsuki Katayama said earlier on Thursday that the timing to take “decisive action” in the market was nearing, in what has been her strongest signal yet of potential currency intervention. Tokyo last intervened when the yen weakened to almost 162 per dollar in July 2024. This comes as weekly data showed investors held the largest short position in the yen since late July 2024.

Traders see 160 as a possible catalyst for potential intervention from Japanese authorities to shore up the currency. Despite the Bank of Japan’s decision to hold on rates, three of its nine-member board voted for rate hikes, while the bank also sharply revised up its price forecasts and stressed the risk of an inflation overshoot. Given the elevated inflation pressures and expectations, it is likely the bank will need to raise rates in the near-term. Money markets now see a 50% chance of a rate hike come June and a 70% chance of a hike at the July meeting.

Watch point: Geopolitical factors/oil prices remain the main obstacle to appreciation against the dollar, even despite policymakers commitment to raise rates.

AUSTRALIAN DOLLAR: The Aussie is 0.55% higher to $0.7157 as a risk-on rally in the market supported the currency. Data on Wednesday showed core inflation rose a little less than expected in the first quarter, although the ongoing impact of surging energy costs still has traders anticipating further interest-rate hikes. Australia’s key trimmed-mean measure of core inflation, rose 0.8% in the first quarter, slightly below market expectations of 0.9% or higher. The annual pace still nudged up to 3.5%, and further away from the Reserve Bank of Australia’s target band of 2%-3%, while consumer price inflation for March accelerated to 4.6%.

Markets are pricing an 80% chance that the RBA will hike rates for a third time this year to 4.35% in May. A move to 4.60% is fully priced by September, which would take rates to the highest point since late 2010. While a durable ceasefire would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to keep the RBA on a tightening path.

Watch point: The RBA is likely to maintain its tightening bias amid persistent inflationary pressures.

TREASURY FUTURES

Yields are lower across the curve, reversing some of yesterday’s moves following a hawkish-hold from the Fed, which saw markets reprice rate expectations modestly to the upside. While only one member voted against the rate decision, three members voted to remove the easing bias language in the monetary policy statement, a signal that there is growing worry on the board over the rise in inflation and a potential hurdle to future policy-easing this year. Yields are approaching their local highs reached in late March and alongside a hawkish change in Fed rate expectations, market participants are signaling they are expecting inflation to stay elevated and prevent any sort of downward policy-action from the Fed as evident in one- and two-year inflation swaps. Today’s PCE data was largely ignored by markets, but reinforced expectations of a Fed hold on policy.

Current levels: 3M 3.675% (−0.6 bps), 2Y 3.887% (−4.5 bps), 5Y 4.021% (−4.2 bps), 10Y 4.386% (−3.0 bps), 30Y 4.972% (−1.4 bps). The 2/10 spread stands at 49.50 bps (1.5 bps wider from 48 bps prior session), the 5/30 spread is at 95 bps (3 bps wider from 92 bps), and the 3M/10Y spread is at 71 bps (uninverted, 2 bps narrower from 73 bps). The move reflects bull steepening, reversal from yesterday’s hawkish-hold sell-off. Market expectations for Fed easing have been pushed further out, though the broader policy outlook remains dovish. Markets are no longer pricing in cuts for 2026.

Watch point: Fed policy is poised to stand pat for the time-being, though a path to loosening remains open. Well-anchored inflation expectations should offer resistance to higher yields, while also supporting the case for Fed easing later in the year.

 

 

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