Mins, CPI to Reveal How Commited the Fed is

Investors feel pretty convinced that the Fed is done with hiking rates, but two events this week could shake that confidence and move the dollar.

The Last Chance for a Hike

According to the latest CME survey, 70% of traders believe there won't be any more rate hikes out of the Fed this cycle. But with headline inflation rising for the second time in a row - and is expected to jump again in September - that consensus could swing around if core inflation doesn't continue its downward trajectory. Before that, however, investors will be pouring over the minutes from the Fed's last meeting that ended in a "hawkish pause". Markets correctly predicted that the Fed wouldn't hike rates but were surprised that the Fed committed to keeping rates high for even longer.

The latest blowout jobs number on Friday left the market to sea-saw as investors tried to figure out how the Fed would react. Initially, the dollar got stronger, but by the end of the day, more traders were convinced of a rate pause at the next meeting. On the other hand, the futures market shifted in the opposite direction, with the chance of a rate hike in November being priced in at 42%, up from 33% on Thursday. Markets are likely working out just how much the rise in bond rates over the last couple of months has put the Fed off from raising rates, particularly in light of San Francisco Federal Reserve President Mary Daly's comments suggesting that no more rate hikes would be needed because of the rising yields. A more dovish Fed speak on Monday has managed to turn the probabilities of a pause to a convincing 84% on Tuesday as traders wait for further appearances.

The Data Expectations

The markets will likely be most interested in how committed the FOMC members are to keeping rates higher when looking through the minutes of the last meeting since that is seen as spurring the recent rise in bond yields. As for the inflation figures, the headline rate is expected to increase for the third time in a row to reach 3.8% from 3.7% prior. But the Fed most closely tracks the core rate, which is expected to keep declining to 4.1% from 4.3% prior. That will be aided by a monthly print expected to grow at just 0.4% compared to 0.6% reported in the prior month.

Meanwhile, the yield curve has become less inverted of late, thanks to higher rates down the curve, as investors weigh the potential for higher rates staying around for longer. With the benchmark 10-year yield poking above 4.8% as inflation comes down, providing a real rate of return, the attractiveness of stocks could remain under pressure. And with the recent geopolitical turmoil, the dollar could keep gaining both as a safe haven and from providing higher real interest rates than other major currency rivals, with Wall Street susceptible to the risk.

Measured Move Shy off Target

The price action of Wall Street indicates growing concern about an impending downward continuation equal to the measured-move protection at 32730 due to a falling pennant. If the decline sees an extension below 32570, the risk of sliding to 31500 will increase. Conversely, winning back the 34k barrier may inspire additional long bets, fueling prices to 35k but unlikely to record highs past 35690 unless the upside completes a rising wedge instead. In the former event, the low might be already in and the measured move projection just slightly above target.

Source: SpreadEx / WALL STREET

Key Takeaways

Investors are still determining the future of hikes despite rising consensus of a pause as increasing inflation could change the outlook. The minutes from the Fed's last meeting will be closely analysed to understand the FOMC's commitment to keeping rates high, as rising bond rates may prove to impacting the Fed's decision-making. With inflation figures expected to increase and the yield curve less inverted, stocks may face pressure while the dollar gains.