5 lessons learned from the upcoming June FOMC interest rate decision

Stock markets will begin the coming week by factoring in May’s disappointing job growth data on Friday. Ordinary people would prefer an economy that creates jobs, while stocks want them to fall. that the Central Bank reduces interest rates.

Investors face two other economic considerations. Wednesday morning, the BLS report on inflation levels for May 2024. In my preliminary report, I expect an increase in the clothing sector, stable food prices and a decline in the automobile sector. At 2 p.m. that afternoon, the Federal Open Market Committee (“FOMC”) will release its statement and announce its monetary policy rate decision.

Ahead of this meeting, the CME FedWatch tool lowered its probability of an interest rate cut after the two June and July Fed meetings. Even though markets expect higher interest rates interest rates longer, what information should readers expect from the FOMC next week? Additionally, in September, the Fedwatch tool indicated an increased likelihood that interest rates would not change. The odds increased from 31.3% on June 6, 2024 to 51%.

Readers should once again monitor US Treasury yield following the meeting. The yields are almost the same from a month ago. They are higher than 5.0% in the short term and are generally lower for those maturing in two years (US2Y) or later.

The FOMC could offer investors five perspectives on the stock markets.

1/ Overview of employment growth in May 2024

In May, the non-agricultural payroll increased by 272,000. Markets expected the economy to add 182,000 people. Health care added 68,000 jobs in May. The government has resumed hiring by adding 43,000 people. Employment in leisure and hospitality added 42,000 people in the month, while food services and drinking places hired 25,000.

Among areas of job growth, readers should overlook government employment data. It is partially correlated with fiscal policy, which also adds pressure to inflation. Governments use these tax funds to hire civil servants. In turn, this strengthens the employment report. The FOMC could eliminate these jobs to assess the effectiveness of its monetary policy. More importantly, the bank would like the economy to create jobs on the supply side of production. Since inflation is demand-driven and supply-constrained, this dampens inflation because jobs added to production would increase supply.

When it comes to stock market ideas, given the increase in government jobs, investors should continue to invest in the defense industry. RTX (RTX), for example, closed at a record high.

The FOMC could comment on the ambiguity of the unemployment rate increases at 4.0%, the highest level in two years. Conversely, the activity rate increased from 62.7% in April to 62.5% in May, the activity rate of very active age groups highest since May 2002. Still, the BLS reported that jobs had nearly doubled.

May, the 1st, Press release 2024, the FOMC said job creation remained strong and the unemployment rate remained low. Given that job growth strengthened last month, the Committee should expect little impact on employment by keeping the current Fed Funds rate between 5.25% and 5.50%. He will reiterate his statement that monetary policy is better balanced between achieving its employment and inflation targets.

2/Overview of the basic personal consumption expenditure price index

The Fed will comment on the PCE price index, which excludes food and energy. This increased by 2.8% in April and is almost in line with the previous three months.

Click to enlarge

Data from https://www.bea.gov/

The Fed prefers this index because it excludes food and energy. Excluding volatile price changes, the Federal Reserve will see persistently high inflation, above its target rate of 2.0%. The Fed will comment on the prices of services, which increased by 3.9%, as the main contributor to the index. For comparison, the price of goods increased by 0.1%.

3/ Schedule of interest rate cuts

The markets initially brushed off Friday’s good employment report by recovering in the morning. At the beginning of the afternoon, the sales volume accelerated. The Nasdaq (QQQ) still closed the week up 2.72%. Conversely, the Russell 2000 (IWM) lost 1.17% on Friday and is down 2.22% for the week. Small businesses are more sensitive to interest rate levels. This group won’t care if interest rates stay the same in June. Instead, he will listen to changes in the FOMC policy statement and Fed Chairman Powell’s choice of words during the question-and-answer session.

The Fed and the stock market will also react to the CPI report on Wednesday morning. The report must demonstrate that inflation is on a firm downward trajectory towards 2.0%.

In a less likely scenario, a hot CPI report in May would reignite fears of an interest rate hike by the Fed. However, it is unlikely that the Fed chairman will suggest that the central bank is changing its wait-and-see policy. Since September 2023, the Fed has hinted at a pause and several rate cuts. A sudden reversal of its policy could shake the market’s upward trend.

4/ Comment on GameStop, Meme Stocks and speculation

The media may ask Fed Chairman Powell about widespread stock speculation in companies like GameStop (GME) and AMC Entertainment (AMC). Expect Powell to dismiss the relevance of two bankrupt companies to monetary policy. Additionally, the trading range for GME stock between $9.95 and $65.00 is under the purview of the Securities and Exchange Commission. The valuation of both companies will adjust downward as their executives take advantage of the market madness and the rise in their stocks by selling their shares to retail investors.

GameStop took advantage of the market’s blind optimism by selling its shares twice. The company has filed an application for sale up to 75 million shares on June 7. On May 24, he sold 45 million shares to raise $933.4 million.

Trump Media (DJT) is another example of extreme speculation. He posted a turnover of $770,500 and an adjusted EBITDA loss of $12.1 million. Still, the company has a market capitalization of $7.88 billion.

The stock market needs more than higher rates to tighten financial credit conditions. Meanwhile, stocks with unusual valuations are an isolated dynamic among speculators and short sellers. In this scenario, businesses are effectively the “house” of a casino. The house almost always wins.

5/ Bond yields

U.S. Treasury yields rose Friday after the jobs report. It could rise again after the release of the inflation report. Wednesday’s FOMC statement is expected to influence bond yield prices the most. In last month’s press release, the Committee said it would “slow the rate of decline of its securities holdings by reducing the monthly repurchase limit on Treasury securities from $60 billion to $25 billion.” He also said he would “maintain the monthly repurchase limit for Treasury securities.” capping agency debt and agency mortgage-backed securities at $35 billion.

Last month, Treasury bonds of 20 years and above (TLT) gained 0.84%, compared to a gain of 0.18% over 7-10 years (IEF).

Your takeaway

Stocks will only find their direction after the FOMC meeting. Markets already expect interest rates to stay the same. This will harm the euro (FXE) and the Canadian dollar (FXC) over the coming months. This benefits the American economy, by reducing the cost of imports.

Expect trading volumes in speculative stocks to continue. Long-term investors should ignore this noise. On the contrary, unchanged interest rates increase the attractiveness of short-term bonds (SGOV). This also justifies taking profits on frothy sectors, like the Nasdaq (QQQ) and S&P 500 (SP500).