Fed interest rate cuts: uncertainty trumps – The Critical Investor

The mood was depressed in Asia today after the most powerful earthquake in 25 years halted operations at TSM and United Microelectronics. Elsewhere, major stock and bond markets in Europe and the US turned red yesterday. Rising oil and commodity prices fueled inflation expectations, while further strength in US economic data fueled concerns that the Federal Reserve (Fed) may not cut interest rates as much as hoped this year.

Red figures in Europe and the US

Elsewhere, the main stock and bond markets in Europe and the US were also painted red yesterday; rising oil and commodity prices fueled inflation expectations, while further strength in US economic data raised concerns that the Federal Reserve (Fed) may not cut rates as much as desired this year. Yesterday’s data showed a faster-than-expected recovery in factory orders, although job openings fell more than expected.

Fed’s interest rate cuts

The market is now pricing in fewer than three Fed rate cuts this year, below the three rate cuts set by Fed members at last month’s FOMC meeting. And while Feds Mary Daly and Loretta Mester said three rate cuts this year seem appropriate — God knows why — Mester added that “it’s a close call” on whether fewer rate cuts will be needed. She was certainly referring to robust economic data and upward ticking inflation!

US yields and dollar index

The yield on the US 2-year yield rose to 4.73% yesterday, the yield on the 10-year yield rose to 4.40%, the S&P500 tapped a toe below the 5200 level but managed to close above this psychological mark . Nasdaq closed almost 1% lower and volatility rose. However, the US dollar exchange rate fell despite the positive pressure on interest rates.

Outlook for the US economy

Today, investors have their eyes on the ISM non-manufacturing index and the latest ADP data. The U.S. economy is expected to have added nearly 150,000 new private jobs in March. Friday’s jobs data will make the difference between those expecting three rate cuts and those expecting just two.

A strong set of employment data – which would add more spice to strong US growth and rising inflation – should further soften the hand of the Fed’s doves, weighing on stock and bond valuations and keeping the US dollar supported against most majors , starting with the euro.

European inflation and economy

The EURUSD rebounded before hitting 1.0740 yesterday as the US dollar fell sharply despite supportive economic data. But data released in Europe confirmed that inflation in Germany fell for the third consecutive month. Inflation in the eurozone is expected to decline further.

Headline inflation is expected to fall from 2.6% to 2.5% and core inflation from 3.1% to 3%.

British inflation and economy

In contrast to strong US growth and rising US inflation since the beginning of the year, the continued slowdown in European inflation and gloomy Eurozone economies justify an interest rate cut by the European Central Bank (ECB). This is expected to continue to put pressure on the EURUSD. Across the Channel, Cable supported near 1.2550 against a broadly weaker US dollar, but the data fueled hopes of a Bank of England (BoE) rate cut as UK retail inflation fell to its lowest level in more than two years.

The US in isolation

While the US economy appears to be on an island with surprisingly strong economic data and rising inflation, dollar inflation could easily spill over to the rest of the world if the US dollar is more strongly supported by a significant decline in expectations of a lenient Fed.

Uncertainty over the number of future Fed rate cuts continues to impact markets and could cause further swings in currencies, stocks and bonds around the world.

FTSE 100 and inflation concerns

FTSE 100 in good place to catch up with the rest of the western indices The tailwind as oil and commodity prices pick up momentum and the UK blue-chip index could be a good hedge against rising inflation concerns.

US stocks and the Fed

Across the ocean, a change in Fed expectations is causing sentiment swings in US stocks. A strong economy in itself is not a cause for concern. If U.S. corporate profits continue to rise, it could help prevent the stock market from collapsing.

Tesla and Rivian

Yesterday Tesla published the report with the delivery figures for the first quarter. The numbers were disappointing. Analysts expected a drop in deliveries of around 6% compared to a year earlier, but deliveries fell by as much as 8.5%. In addition, supplies were running high. This increasing inventory will put further pressure on Tesla’s cash flow. The share price closed almost 5% lower. As long as the 50% annual sales growth story remains unlikely, Tesla is expected to continue making losses. Tesla’s price-to-earnings ratio is still around 63, which means the company can still drop significantly.

Elsewhere, Rivian built and sold more electric cars (EVs) than expected. Still, the share price fell by more than 5%. This is due to the overall bleak outlook for the EV sector.