Macro the week ahead

Macro Week Ahead: Federal Reserve Policy Meeting, U.S. and China Inflation Data

By:Ilya Spivak

Stock markets are at risk if recession fears return even as sticky inflation delays Federal Reserve interest rate cuts

  • Another week of gains for technology stocks masks worries about slowing growth
  • Global recession fears may build if Chinese inflation data undershoots expectations
  • May U.S. CPI report, Fed monetary policy update in the spotlight for the markets

At first blush, Wall Street seemed to be in good spirits last week.

The bellwether S&P 500 stock index as well as the tech-leaning Nasdaq 100 scored strong gains, adding 1.1% and 2.4% respectively. For the former benchmark, it was the strongest performance in three weeks. For the latter, it was the biggest week of upside progress since mid-April.

Look elsewhere however, and the picture seems bleaker. The blue-chip Dow Jones Industrial Average traded nearly flat, adding just 0.17%. The small-cap Russell 2000 shed 2.24%, its biggest loss in seven weeks. As much was echoed at the sector level. Technology led the way higher, while losses were centered on energy, industrials, materials and utilities.

All this seems to hint that equity markets are beginning to consider a business cycle downturn. At the same time, a worrying sign emerged from the bond market: 10-year Treasury yields fell while the two-year rates held broadly steady. This is evocative of a “bull flattener” yield curve dynamic, which often appears in the runup to recession.

How might investors reconcile a slowing economy with a U.S. central bank that appears hamstrung by slow progress toward lower inflation?

Here are the macro waypoints that are likely to shape price action in the week ahead.

Chinese inflation data

China’s consumer price index (CPI) measure of inflation is expected to have risen 0.3% year-on-year in May, matching April’s outcome. The producer price index (PPI)–a measure of wholesale inflation—is expected to remain in negative territory at -1.8% year-over-year.

Analytics from Citigroup show that Chinese economic data outcomes have gradually deteriorated relative to baseline forecasts over the past two months. That might set the stage for disappointing outcomes that underscore anemic conditions in the world’s second-largest economy. Renewed global recession fears may follow.

China inflation: Consumer and producer prices
Source: NBS

U.S. consumer price index (CPI) data

Core inflation in the U.S. is expected is expected to continue cooling in May, according to consensus forecasts. CPI excluding volatile food and energy prices—the version of the closely-watched inflation measure that is seen as most relevant for Federal Reserve officials–is set to inch down to 3.5% year-on-year.

That would mark the lowest reading in over three years. The headline measure is penciled in at 3.4% year-on-year, unchanged from April.

While the downtick at the core represents welcome progress, it seems unlikely to imbue central bank officials with the confidence needed to cut rates faster than is currently anticipated. In any case, traders will probably reserve judgement until the Fed issues its latest policy update mere hours after the data comes across the wires.

U.S. consumer price index Y/Y
Source: BLS

Federal Open Market Committee meeting

The Federal Reserve’s policy-steering group, the Federal Open Market Committee, is widely expected to keep the target range for the fed funds rate unchanged at 5.25-5.50%. The markets have priced in 28 basis points (bps) of stimulus this year, implying one standard-sized 25 bps reduction and a meager 12% probability of a second one. A move is expected in November or December.

With no rate changes on the menu this time around, traders are likely to focus on the updated Summary of Economic Projections (SEP) from central bank officials. Their March call for three cuts in 2024 will almost certainly get revised down to a setting closer to the markets’ 1-2 cut baseline.

How the view for 2025 is adjusted may be more interesting. As it stands, traders are anticipating 70bps in cuts next year. That is squarely in line with the Fed’s last update. They may be most interested to see if a “higher for longer” stance this year pushes additional cuts into next year’s tally. If not, a wave of disappointed de-risking might weigh on stocks.

Futures-implied 2024-25 fed outlook vs. S&P 500
Source: CME

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro. 

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