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Fed Signals More Rate Hikes as Markets React

Market Update - Daniel Ang The Accidental Trader Traders Academy International 10

In this daily market update, we delve into the latest developments that unfolded on Wednesday, June 15, 2023. The U.S. equity markets experienced mixed results as the Federal Reserve opted to keep interest rates unchanged but signaled the likelihood of further rate hikes before the year’s end. This decision led to choppy trading, as investors absorbed the hawkish tone adopted by the Federal Open Market Committee (FOMC), headed by Fed Chair Jerome Powell. Let’s dive into the details and explore the potential implications for various markets.


Federal Reserve’s Hawkish Stance and Market Reaction

The Federal Reserve’s decision to leave interest rates unchanged while hinting at forthcoming rate hikes prompted a mixed response in U.S. equity markets. The FOMC’s announcement signaled an additional 0.5% increase in borrowing costs by the end of the year. This adjustment aligns with officials’ expectations that the fed funds rate will reach 5.6% in 2023. This projection implies two more 25 basis points (bps) increases, surpassing the previous estimate of 5.1% released in March.

The market reaction to this news was marked by increased wagers on a rate hike next month, with bets now exceeding 70%. Notably, the decision to skip a hike in June further fueled expectations for a tightening of monetary policy in the near future.

European Central Bank and Bank of Japan Awaited

Looking ahead, investors turned their attention to the European Central Bank (ECB) and Bank of Japan (BoJ). The ECB’s rate decision, scheduled for today, carries expectations of a 25 bps hike, followed by another increase in July. However, projections indicate that the ECB may pause rate adjustments for the remainder of the year after these anticipated moves.

Meanwhile, the BoJ is set to announce its monetary policy decision tomorrow. Market participants anticipate that the BoJ will maintain its ultra-dovish stance and yield curve control settings. This approach aligns with the prevailing economic conditions and the central bank’s ongoing efforts to support the Japanese economy.

U.S. Equity Market Performance

Against this backdrop, U.S. equity markets displayed mixed results on Wednesday, June 15, 2023. The Dow Jones Industrial Average experienced a 0.7% decline, closing at 33,979.3. In contrast, the Nasdaq Composite rose by 0.4% to reach 13,626.5. The S&P 500 displayed a marginal increase of 0.1%, closing at 4,372.6.

Yield Movements and Economic Indicators

The U.S. 10-year yield observed a decline of 4.1 bps, settling at 3.8% on Wednesday. Conversely, the two-year rate rose by almost one basis point, reaching 4.7%.

In other economic news, the Producer Price Index (PPI) for the previous month showed an annual increase of 1.1%, following a 2.3% gain in April. May’s figures represented the smallest annual increase since December 2020 and fell short of the consensus expectation of a 1.6% rise. On a sequential basis, PPI declined by 0.3% in May, compared to a 0.2% gain in April, deviating from the projected 0.1% drop.

Currency and Commodity Market Performance

Following the Federal Reserve’s decision to maintain interest rates, the U.S. Dollar experienced a decline. The Dollar Index closed down 0.3% at 103.01, reaching a four-week low of 102.66 during the session.

EUR/USD witnessed a reduction in gains and was last traded at 1.0827, with a 0.3% increase. USD/JPY rose by 0.2% to 139.905. Additionally, GBP/USD saw a rise of 0.4% to 1.2660, reaching its highest level since April 2022 at 1.2699. The chances of the Bank of England (BoE) implementing a 0.5% rate hike at its upcoming meeting have surged to 20% following unexpectedly robust wage-growth data released on Tuesday.

Turning our attention to the commodity markets, commercial crude stockpiles in the United States witnessed a significant increase of 7.9 million barrels, reaching a total of 467.1 million barrels by the week ending on June 9. The International Energy Agency stated that global oil demand is anticipated to hit a record high this year, largely driven by China and India. However, the agency also indicated that demand growth will slow considerably in the coming years as the world transitions to cleaner energy technologies.

On Wednesday, West Texas Intermediate (WTI) crude oil experienced a decline of 1%, closing at $68.71 per barrel. Meanwhile, gold remained relatively stable, with little change at $1,959/oz, while silver witnessed a modest increase of 0.9%, closing at $24.03/oz.

Cryptocurrency Market Performance

In the cryptocurrency market, Bitcoin (BTC) recorded a 3.65% drop, settling at $24,987 on Wednesday. This decline represents a $947 loss from its previous close. Moreover, BTC has experienced a 19.5% decrease from its peak of $31,035 recorded on April 14. Similarly, Ether (ETH) depreciated by 5.36%, closing at $1,646.1, with a decline of $93.3 from its previous close.

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