Market awaits Fed’s decision

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Global markets are in wait-and-watch mode today as they are waiting for the outcome of the Fed meeting. The general consensus is that Fed will not increase the interest rates as it will try to assess the impact of previous rate hikes. Yesterday US CPI came at 4% (YOY) in May and it was the lowest in 2 years. Expectations were of 4.1% inflation rate in May. Inflation has fallen sharply as in the month of April it was 4.9%. However, core inflation fell from 5.5% (YOY) in April to 5.3% (YOY) in May. Headline inflation contains volatile components like food and oil. So Central Banks have more focus on core inflation. On the employment side, the unemployment rate has also increased from 3.4% to 3.7% in May. Still labor market is tight and that’s why there is some buzz in the market that in the July meeting, Fed might again increase rates.

There are some cracks in the US economy as in the last few months its Manufacturing PMI came above 50 only once. The business confidence index has continuously fallen, the industrial production growth rate is on a downward trend. On the consumption side, the retail sales growth rate is falling and the consumer confidence index is showing a mixed trend. So all this presents a very mixed situation regarding economics and that’s why Fed is expected to pause the rate hike and go in wait and-watch mode.

Talking about other central banks, RBI kept its interest rate on pause, while ECB is expected to increase rates. While the Bank of Japan might keep interest rates on hold. China went in the other direction and cut interest rates. So now the market is cautiously eyeing the Fed’s decision and it’s commentary regarding the future.