Global market sentiment turned risk-averse this week amid renewed worries about the banking sector, and there is a lot of confusion right now in terms of where the global economy is headed and what the Federal Reserve is going to do next week. As recession fears resurfaced in the US, the outcome of next week’s FED meeting could set the tone for the rest of the weeks.
The Federal Reserve’s FOMC will conclude its 2-day meeting with the release of its monetary policy statement on Wednesday, May 03, followed by a press conference with Chairman Jerome Powell. Along with the policy statement, an updated “Dot Plot” and summary of Economic Projections will also be released. US FED chair Powell's speech should be more closely scrutinized for language and tone as he signals the FED's direction for the coming months.
Inflation in the United States is finally on its way down. US headline CPI rose 5% y/y in March, marking the smallest increase since May 2021 and down from 6% in February. The most recent employment numbers also indicated that the economy is slowing. Although employment is slowing down and inflation is cooling down again, the markets continue to expect that the Fed will raise a 25-basis point rate rise at its next meeting and money markets are already pricing in an 85% chance of a 25-bps hike from the Fed.
“One more move should be enough for us to then take a step back and see how our policy is flowing through the economy, to understand the extent to which inflation is returning back to our target,” Atlanta Federal Reserve President Raphael Bostic said Tuesday.
First Republic Bank shares hit a record low, the banking crisis is not over
First Republic Bank shares tumbled almost 60% this week after the bank reported a significant deposit drop in the first quarter of 2023. First Republic Bank Lost $102 Billion in Customer Deposits due to the recent regional-banking crisis, which has led to customers withdrawing their funds. After the renewed concerns over the US banking sector, investors have become increasingly confident that a more conservative policy will be adopted by the Federal Reserve.
We anticipate the US central bank will likely pause interest rate hikes after May and expect rate cuts to begin in the second half of the year following the release of disappointing financial results from the First Republic Bank and UBS, but it depends crucially on the "totality" of upcoming data. Therefore, investors should closely monitor the upcoming PCE inflation and employment data to make investment decisions for their portfolios.
We don't exclude the continuation of high volatility in the coming days due to the renewed concerns about slowing global economic growth and the long-awaited May Fed meeting is now just days away, it's advisable to implement a stop loss on every trade to prevent a huge loss.
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