Market Overview

Markets are receiving mix signals ahead of the Federal Reserve’s (Fed) meeting that is starting today. The American economy has slowed down as GDP in the first quarter of 2023 rose by 1.1% only compared to 2.6% in the previous quarter. The Personal Consumer Expenditure Index (PCE) decline to 4.2% in March against 5.1% in February. These are major developments for the Fed as it may be less hawkish amid a slowing economy and inflation indications that have neared its 3.3% target in 2023.

Investors are now betting that the monetary watchdog will cut interest rates from 5.25% this September, while previously believing that interest rates will remain at high levels until the end of 2023.

These considerations inspired the stock market, oil prices, and emerging currencies. The S&P broad market index surged by 3% to 4169 on May 2 against 4050 points on April 26. Brent crude prices rose to $80 from $77.7 per barrel for the same period. The Loony, the Kiwi, and the Aussie strengthened. An unexpected increase of the interest rate to 3.85% from 3.6% by the Reserve Bank of Australia (RBA) contributed to the rally in the latter.

On the other hand, a slowdown in U.S. economy raises the risk of a nearing recession. The eurozone has recorded a slowdown in its GDP to 1.3% in the first quarter of 2023 compared to 1.8% in the previous quarter. So, the issue is seen to be mostly global and not isolated. This also limits the European Central Bank (ECB) in its efforts to rise its interest rates further. This has affected the EURUSD upside target that is now at 1.1000 down from 1.1100 previously.

The Bank of Japan (BoJ) has added some disappointment to the economic mood as its new governor, Kazuo Ueda, preferred to stick to the monetary easing policy of his predecessor, Haruhiko Kuroda. The BoJ “decided to conduct a broad-perspective review” of its easing measures for around 1-1.5 years. “The Bank will continue with QQE (Quantitative and Qualitative Monetary Easing) with Yield Curve Control, aiming to achieve the price stability target as long as it is necessary for maintaining that target in a stable manner,” it said in its outlook. So, the Country of the Rising Sun has become the Country of the Falling Yen. The USDJPY surged by 3% to 137.7, which is this year’s highs.

Markets are engulfed by uncertainty and contradictions. Bets of an earlier-than-expected interest rate decrease by the Fed led to a rally in risky assets, but had a minor effect on the Dollar itself. Moreover, the U.S. Dollar index rose to 102 points from 100.8 points.

Such developments increase uncertainty ahead of the Fed meeting. The increase of the interest rates to 5.25% from the current 5.00% has already been discounted by the markets. It is all about the Fed’s rhetoric. Fed’s Chairman, Jerome Powell, and his fellow members understand that less hawkish notes in the statement may boost inflation. This is particularly important after the Fed added some $400 billion to the economy during the banking crisis this March. This monetary injection will have additional implications on prices, and is expected to also inflate the Consumer Price Index (CPI) and CPE indications.

On the other hand, largely anticipated interest rate hikes are untimely amid raising recession fears and newly emerged repercussions of the banking sector crisis. This may lead the Fed to avoid any indication of an additional monetary tightening in its statement. It may even allude to possible interest rate decline dates.

This is not the best time for an investor to make long-term trades, and it is better to wait until the Fed settles all interest rate issues by May 3.

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