The global market is facing the “critical 6 hours”!

Release time:Jun 12, 2024 14:18 PM

"Tonight, I have no dinner date, nor will I drink at home. Instead, I will quietly wait for the release of the US consumer price index. Then, I will stay up at 3 a.m. to wait for the Fed's decision." The arrangement of Sakai, chief manager of the foreign exchange and financial product trading department of Mitsubishi UFJ Trust Bank in Tokyo, may be a template for most investors around the world, because they will all usher in the "critical six hours": from the US Department of Labor to release the May consumer price index at 20:30 Beijing time tonight, to the Federal Reserve to announce the latest interest rate decision at 2:30 a.m. Beijing time on Thursday, followed by a press conference by Federal Reserve Chairman Powell. Since 2014, the above events have only occurred on the same day seven times.

UBS economist Pinge joked that this day "packed months of macro risks into the same day." In line with Wall Street's overall expectations, he expects the U.S. May CPI data, coupled with last week's unexpectedly strong non-farm payrolls and other recently released economic data, to lead the Federal Reserve to adjust its outlook for inflation, economic growth and interest rates.

May CPI and Fed decision come together

According to a survey report for economists, the economists surveyed expect the US CPI in May to increase by only 0.1% month-on-month from April, lower than the month-on-month increase of 0.3% in April. If the final data meets expectations, this will be the smallest month-on-month increase in CPI since October 2023, but it will still be equivalent to an annualized total increase of 3.4%. The core CPI, which excludes food and energy prices, is expected to record a month-on-month growth rate of 0.3% and an annual growth rate of 3.5%.

These expectations are not significantly different from the CPI data in April, which still shows that US inflation is well above the Fed's 2% target. But some economists said that in-depth research on several important indicators, such as insurance costs and core service industry inflation excluding housing, showed that US inflation was at least moving in the right direction, although gradually. "On the inflation side, more of the same and continued evidence is expected to show that the broader disinflation trend remains 'intact', and the tougher first quarter inflation data is just a pause in the downward trend," said Yanasievich, portfolio manager and chief strategist at Natixis Investment Managers.

Of course, the market is more concerned about the Federal Reserve’s interest rate decision that follows and Powell’s statement at the press conference.

At the press conference after the May FOMC meeting, Powell said there are two ways for the Fed to have enough confidence to cut interest rates: more data showing that inflation is getting closer to the Fed's 2% target, or the labor market is unexpectedly weak. At present, neither of them seems to be met. Therefore, it has become a general expectation of the market that the meeting will remain unchanged.

Therefore, the market is more concerned about how the Fed will adjust its economic and inflation expectations, as well as how the "dot plot" will be adjusted. Investors expect that the quarterly economic forecast update will also be affected by the previously released May CPI data. The Fed will raise its inflation expectations compared with the March quarterly forecast, but lower its economic growth expectations. As for the "dot plot", the market currently expects that the Fed is likely to adjust the previously hinted "three rate cuts" to "two rate cuts". Among the major Wall Street investment banks, Goldman Sachs expects two rate cuts, the first in September. Citigroup still expects three rate cuts, but expects the dot plot to be adjusted to two. Bank of America even expects only one rate cut this year. Ping said that if the Fed signals that it will only cut interest rates once, it will have to wait until at least November or December before taking action.

But after the European Central Bank jumped the gun last week and cut interest rates for the first time in five years, U.S. Democratic Senators Elizabeth Warren, Jackie Rosen and John Hickenlooper wrote to Powell on Monday local time, saying that the ECB's actions showed that it was time for the Fed to start cutting interest rates. "The Fed's decision to keep interest rates high continues to widen the gap between the U.S. and Europe, which could push up the dollar and tighten U.S. financial conditions." They added, "The Fed has kept interest rates at higher levels for too long, and it is time to cut interest rates."

On Tuesday local time, the U.S. market seemed to remain calm about the upcoming "critical six hours": the S&P 500 and Nasdaq set new historical highs, and the 10-year U.S. Treasury auction attracted the highest bid multiple in two years.

During today's Asia-Pacific trading session, U.S. stock futures also remained stable overall. But the market is betting that this "calm before the storm" may soon be broken.

Kaiser, head of U.S. equity trading strategy at Citi, said the options market expects that the CPI data plus the announcement of the Fed's interest rate decision may cause the S&P 500 index to fluctuate by 1.25% on the same day, which will be the largest fluctuation in market expectations before the Fed's decision since March 2023. "Over the past year, the market's average expected volatility for CPI release days and Fed decision days is usually 0.75%, which means that the forecast volatility has almost doubled this time, which not only highlights the importance of the two events, but also increases market uncertainty." He added that after these two types of events, the average volatility of the S&P 500 index is 0.8%, among which the volatility on the Fed's decision day is usually more favorable to option buyers.

Analysis of par straddle options expiring on the same day by JPMorgan Chase's trading platform also shows that the market is currently betting that the S&P 500 will fluctuate by 1.3% to 1.4% before this Friday, which is even greater than Citigroup's expectations. "Par straddle options expiring on the same day" is an option trading strategy that refers to traders buying a call option and a put option at the same time, and the strike prices of the two are the same and are often close to the current market spot price of the underlying asset. The bank also pointed out in the report that there is a possibility of inconsistency and contrast between the May CPI data and the subsequent Fed interest rate decision and Powell's press conference statement. In JPMorgan's view, if the month-on-month increase in the core CPI in May exceeds 0.4%, all risk assets may be sold off, causing the S&P 500 to fall by 1.5% to 2.5%, but this possibility is only 5%. Once the month-on-month increase in the core CPI drops below 0.2%, it will be regarded as a major positive, which may trigger a 1.75% to 2.5% increase in the S&P 500. But in any case, it means increased volatility.

Regarding the U.S. Treasury market, Mazier, a senior portfolio manager at fund giant Vanguard Group, said that U.S. Treasury bonds are in a wide yield range and "every data release is a high volatility event." Based on this, the group has become "very tactical" in its U.S. Treasury positions, and "we have reduced our positions" before the release of CPI data and the Fed's decision. Sahu, chief global derivatives strategist at Bloomberg Intelligence, also said: "The volatility of U.S. Treasury bonds has tended to increase before and after the release of important data recently." Since the release of non-farm payrolls last week, the open interest in 10-year Treasury futures has fallen by about 80,000, indicating that traders are closing bullish bets. In the spot U.S. Treasury market, investors are also betting on "higher and longer" Federal Reserve interest rates. A JPMorgan Treasury client survey on Tuesday showed that investors' net long positions in U.S. Treasury bonds fell to the lowest level in two months.

The US dollar index has already fluctuated. The one-week volatility of the Bloomberg Dollar Index has risen to its highest level this year, and the risk reversal indicator shows that the premium of US dollar call options exceeds 0.4%, which has also reached the highest point in a month.

Compared with the U.S. stock market, which continued to rise "against the wind" overnight, Asia-Pacific stock markets have fallen slightly during today's trading session due to the negative news that the Fed's postponement of interest rate cuts is generally bad news for other economies. MSCI's broad Asia-Pacific stock index excluding Japan fell 0.1%, and the Nikkei index fell 0.8%. However, Asia-Pacific technology stocks are still as strong as U.S. technology stocks, and the MSCI Asia-Pacific IT Index still recorded a 1% increase. So far this year, swap traders have significantly reduced their bets on the number of Fed rate cuts, from more than 6 times at the beginning of the year to nearly one time. This has led to the continued strength of the U.S. dollar, which has put pressure on Asian currencies such as the yen and a number of emerging market currencies. The Bank of Japan has therefore had to intervene in foreign exchange and increase market expectations for the Bank of Japan to raise interest rates. Many Southeast Asian currencies are also testing key support levels.

Therefore, emerging market experts like HDFC Bank Chief Economist Gipta are also on high alert as the "critical 6 hours" approach. He said: "Today's events, especially the Fed's interest rate decision and dot plot, are very important, especially for the Indian rupee, and may trigger the rupee to enter a new trading range. If the US CPI rises more than expected or the Fed is more hawkish than expected, then carry trades involving riskier emerging market currencies such as the Indian rupee and the Indonesian rupiah may come under pressure."

Shoki Omori, chief strategist at Mizuho Securities in Tokyo, even said that global investors should "keep cash in mind" right now, and said that they will pay close attention to the yen's trend. Although Wei Li, a fund manager at BNP Paribas Asset Management, still maintains an overall positive position in the US, Japanese and Asian emerging market stocks, he has "implemented some tactical adjustments and turned to shorter-term bonds." Soft, global chief investment officer of multi-asset solutions at Manulife Asset Management, also said: "We are reluctant to make big bets in any direction before this interest rate decision. The size of our total bets has also declined this year, mainly due to the uncertainty of when and how much the Fed will cut interest rates."

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