Macro

"S&P 500 Braces for 1.25% Swing on Fed's Rate Decision"

Asian markets mixed as investors await Fed decision and key inflation data; S&P 500 sees potential 1.25% swing.

By Mackenzie Crow

6/10, 18:39 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
GameStop Corporation
NVIDIA Corporation
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Key Takeaway

  • Asian markets show mixed sentiment ahead of key US inflation data and Fed rate decision, reflecting Wall Street's cautious stance.
  • The S&P 500 hit a record high, Nvidia began trading post-stock split, while GameStop saw significant declines.
  • Traders anticipate volatility with potential 1.25% S&P 500 movement; Fed's "dot plot" on rate projections will be crucial for market direction.

Mixed Sentiment in Global Markets

Asian futures indicate a mixed start to trading, reflecting the subdued session on Wall Street as investors await the Federal Reserve decision and key inflation data. Tokyo stocks are poised to rise, while Sydney markets may see a decline. Political uncertainties in Europe, including French President Macron's legislative vote announcement, are also impacting market sentiment.

Anticipation Builds Around Fed Decision

Wall Street's major trading desks are cautioning investors to brace for potential market volatility post the upcoming consumer price index and US rate decision. While the Fed is expected to maintain borrowing costs, uncertainty looms over officials' rate projections. The market remains on edge, with economists split on whether the Fed will signal two cuts, one cut, or no cuts at all in the "dot plot."

Market Reactions and Expectations

The S&P 500 closed at a fresh record, with Nvidia Corp. commencing trading post a stock split, while GameStop Corp. faced a significant decline. The Treasury market saw minor movements following a lackluster three-year auction, with focus shifting to the upcoming 10-year sale. Oil prices rebounded from last week's selloff, indicating a recovery in the commodity market.

Impact of Fed's Rate Projections

The release of the new "dot plot" outlining the Fed's rate projections is anticipated to be a key focus for investors. The Fed's patient approach towards higher rates is expected to keep bond yields elevated amidst persistent inflationary pressures. The market awaits the Fed's guidance on the path of rates, which will likely shape investor sentiment and market dynamics in the near term.

Market Volatility Ahead

Traders are gearing up for wider swings on Wednesday, with the consumer price report in the morning and the Fed's rate decision in the afternoon. The options market suggests a potential 1.25% movement in the S&P 500, marking the largest implied swing ahead of a Fed decision since March 2023. Investor enthusiasm for stocks remains high, with a majority expecting US stocks to outperform Treasuries in the coming month.

Street Views

  • Chris Larkin, E*Trade from Morgan Stanley (Neutral on the interest rate outlook):

    "The interest-rate guessing game goes on. Even the friendliest inflation numbers probably won’t push the Fed to act any sooner than September."

  • Jason Pride and Michael Reynolds, Glenmede (Cautiously Optimistic on fixed income market):

    "For fixed income investors, the Fed’s more patient higher-for-longer approach is likely to keep bond yields elevated as inflationary pressures remain."

  • Stuart Kaiser, Citigroup Inc. (Neutral on S&P 500 volatility):

    "The options market is betting the S&P 500 will move 1.25% in either direction that day... Should that pricing remain in place by Tuesday’s close, that figure would be the largest implied swing ahead of a Fed decision since March 2023."