The Fed’s Focus is on Inflation

STOCK INDEX FUTURES

The National Federation of Independent Business small business optimism index was down to 93.1 in May of 2022, the lowest since April of 2020, and compared to 93.2 in April. The median expectation was 93.0. In addition, the share of owners expecting better business conditions over the next six months hit a record low.

The producer price index for May increased 0.8% on a monthly basis, as expected and on an annualized basis the producer price index increased 10.8% when up 11.0% was anticipated.

The Federal Open Market Committee is holding a policy meeting today and Wednesday.

Wednesday’s 1:00 p.m. central time policy announcement will be followed by a press conference with Fed Chair Jerome Powell at 1:30.  The Fed will also release its latest summary of economic projections on Wednesday, offering officials’ forecasts for GDP growth, inflation and future rate increases.

CURRENCY FUTURES

The U.S. dollar index is a little lower today but remains near the highest level since late 2002.  

Expectations for economic growth in Germany improved in June, data from the ZEW economic research institute showed.  The index of economic expectations increased to minus 28.0 in June from minus 34.3 in May. Economists had projected the index climbing to minus 26.5.

Average weekly earnings, including bonuses in the U.K. increased by 6.8% year-on-year to in the three months to April of 2022, which is below 7.0% in the three months to March and much less than forecasts of 7.6%.

The Bank of England is predicted to deliver a quarter point rate hike on Thursday.

The possibility of an even wider interest rate differential between the U.S. and Japan continues to pressure the Japanese yen, which yesterday fell to its lowest level since 1998.

INTEREST RATE MARKET FUTURES

Market markets are now pricing a 75 basis-point hike from the Federal Open Market Committee tomorrow rather than a 50 basis-point hike that was predicted up until yesterday.

Financial futures markets are predicting there is a 91.8% probability that the Federal Open Market Committee will hike its fed funds rate by 75 basis points and an 8.2% probability that the  rate will increase by 50 basis points at the June 15 policy meeting.

It is anticipated that the Fed will raise interest rates by 50 basis points at the July and  September meetings.

Currently the Fed’s focus is clearly on inflation, while a slowing economy will be problem for the Fed to deal with later.

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