Macro

‘Set the Alarm’ Rings Across Asia Desks on Double-Whammy Fed Day: CPI and Rate Decision

Investors brace for US CPI and Fed decision, with expected 3.4% annual CPI rise and rates at 5.25%-5.50%.

By Mackenzie Crow

6/11, 18:55 EDT
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Key Takeaway

  • Investors across Asia are preparing for a volatile market day due to the US CPI release and Fed's rate decision, impacting stocks, bonds, and currencies.
  • Swaps traders have reduced rate cut bets from six to closer to one for 2024, causing a selloff in Treasuries and strengthening the dollar.
  • Emerging market currencies like the Indonesian rupiah and Indian rupee could face pressure if US inflation exceeds expectations or if the Fed adopts a hawkish stance.

Anticipation for US CPI and Fed Decision

Investors globally are gearing up for a pivotal day in the economic calendar, with the release of the US Consumer Price Index (CPI) and the Federal Reserve's policy meeting. These events are expected to significantly impact markets, from stocks to bonds and currencies. Motonari Sakai, chief manager at Mitsubishi UFJ Trust & Banking Corp., exemplifies the anticipation, stating, “I have no dinner appointments, I will refrain from drinking at home to watch the US CPI release in peace.” The dual events have the potential to upend markets, given the likelihood of changes to the Fed’s closely watched quarterly rate projections, known as the dot plot.

Market Reactions and Expectations

The outlook on the Fed’s rate trajectory has been volatile, with swaps traders reducing their bets for rate cuts in 2024 from more than six to closer to one. This shift has led to a selloff in Treasuries and a rebound in the dollar, affecting Asian currencies like the yen and the yuan. Despite regional complexities, US monetary policy remains the most critical input for traders worldwide. The time difference with the US adds to the challenge, forcing traders to stay up late to parse through the Fed’s outlook. Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore, advises, “Set the alarm — it’s going to be extra wee early.”

CPI Inflation and Fed Meeting Projections

The CPI report for May is expected to show a 0.1% month-over-month increase, equating to an annual rise of 3.4%. Excluding food and energy, the core CPI is projected to show a 0.3% monthly gain and a 3.5% annual rate. These numbers, while not dramatically different from April, still indicate inflation running above the Fed’s 2% target. Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers, expects “continued evidence that the broader disinflationary trend is still intact.”

The Fed is expected to keep its benchmark overnight borrowing rate in the range of 5.25%-5.50%. However, the focus will be on the quarterly updates to the Summary of Economic Projections and the dot plot. The consensus is that the Fed will adjust the dot plot upward, likely indicating fewer rate cuts for 2024. UBS economist Jonathan Pingle notes, “The day packs months of macro risk into one day.”

Market Volatility and Investment Strategies

The options market is betting on a 1.25% move in the S&P 500 Index in either direction, the largest implied swing ahead of a Fed decision since March 2023. Stuart Kaiser, Citigroup Inc.’s head of US equity trading strategy, explains, “Over the past year, the markets have largely priced CPI and Fed days similarly at 0.75% each on average, so doubling them up makes it a bigger event and raises uncertainty around the event.” Recent economic data, including a strong nonfarm payrolls report, suggest that the Fed may maintain a higher-for-longer rate stance.

On the FX front, one-week volatility on the Bloomberg Dollar Index is at a high for the year, with risk reversals showing a premium for greenback calls. Tanvir Sandhu, Bloomberg Intelligence’s chief global derivatives strategist, notes, “The bond market continues to remain volatile around data releases while for equity the secular theme of AI dominates.”

Street Views

  • Motonari Sakai, Mitsubishi UFJ Trust & Banking Corp. (Neutral on US CPI and Fed decision):

    "I have no dinner appointments, I will refrain from drinking at home to watch the US CPI release in peace... Then I will probably stay up at night for the Fed decision at 3 a.m."

  • Sakshi Gupta, HDFC Bank Ltd. (Cautiously Optimistic on Indian rupee):

    "The meeting is very important especially for the rupee. It could be a trigger for the rupee to move into a new range."

  • Shoki Omori, Mizuho Securities Co. (Bullish on gold and silver):

    "Cash is king."

  • Wei Li, BNP Paribas Asset Management (Cautiously Optimistic on US, Japanese and emerging Asia equity markets):

    "[We have] retained positive positions in US, Japanese and emerging Asia equity markets with some tactical adjustments implemented and shifted toward shorter duration."

  • Vishnu Varathan, Mizuho Bank Ltd. (Neutral on preparing for market events):

    "Set the alarm — it’s going to be extra wee early... Ideally the right way to prepare for this is to take the day off, sleep through the afternoon, wake up at 11 p.m. with some coffee and Twisties, and sit in front of the screen."

  • Kyle Rodda, Capital.com (Neutral on handling market events):

    "Straight in front of the laptop at home before a quick run into the office after the presser... The dealing team has it worse."