The Federal Reserve (Fed) meeting went better than many expected. The Fed left interest rates unchanged as planned, but Chair Jerome Powell repeated that the rate cuts will begin ‘sometime this year’ and that it would be appropriate to slow the pace of QT ‘fairly soon’. There is no particular time regarding when the Fed will start giveaways, but we know that the recent uptick in inflation, the strong NFP figures, or the above-target growth don’t seem to be a concern for most Fed members. 10 of them plotted three or more rate cuts for this year, and 9 of them plotted two rate cuts or fewer. The median forecast is three rate cuts, unchanged from the December plot. The only hawkish tilt was for 2025. In 2025, the Fed members expect three cuts and not four. Voila.
Yesterday’s Fed decision was such a relief for the market, where the fear of seeing the Fed turn hawkish was reigning. The probability of a June rate cut spiked past 75% after the meeting from around 60% on Monday. The US 2-year yield sank below 4.60% after having approached the 4.80% earlier this week. The 10-year yield retreated below 4.30%, the dollar index gave back last week’s gains, and returned to February to March descending channel. Equities soared, of course, the S&P 500 rallied past the 5200 mark and closed at a fresh ATH, while Nasdaq jumped more than 1% as well following such a dovish surprise from the Fed.
Ouch, Gucci!
In Europe, mood was much less cheery, as the 11% plunge of Kering, the owner of Gucci, raised questions regarding the health of the rest of the European luxury stocks. Kering (EPA:PRTP) revealed that Gucci sales will fall 34% in Asia and about 20% worldwide versus a 4% dip predicted by analysts. Gucci makes up around 60% of the company’s total profit, hence Kering now expects global sales to fall by around 10% this quarter, versus only 3% penciled in by analysts. No wonder the news is quite a shocker for Kering and a strong warning for other luxury brands like LVMH, Hermes and Richmond. LVMH lost more than 1.50% yesterday, while Hermes remained near flat.
On the central bank front, European Central Bank (ECB) head Christine Lagarde didn’t enchant Europeans when she said that the ECB can’t commit to rate cuts beyond a first cut in June. She repeated that they ‘will know a bit more by April and a lot more by June’. The EUR/USD jumped on the back of more dovish Fed and more hawkish ECB news, should extend gains above the 1.10 level and steady within 1.10/1.12 range as the US dollar should extend losses across the board, unless a big surprise derails the dovish Fed expectations. For now, there is no reason to doubt the Fed’s determination to cut in summer.
BoE Decides Following Soft Inflation Report
Today, it’s the Bank of England’s (BoE) turn to announce decision. Yesterday’s softer-than-expected inflation figures and last week’s softer-than-expected jobs data are supportive of the BoE doves. Of course, the BoE is not expected to change rates today, but the MPC members’ votes will be the key takeaway from today’s announcement. If more MPC members vote in favor of a rage cut, we will likely see the BoE rate cut expectations pulled earlier this summer. For now, a 25bp cut is fully priced in for August – unchanged after yesterday’s inflation report. Cable jumped yesterday despite a soft inflation report as the selloff in the US dollar weighed heavier on the balance. And the same reasoning than with the EUR/USD applies here. Cable is set to extend gains further, and the bulls could eye a rise to 1.30 if the US dollar remains under pressure on the back of strongly dovish Fed expectations.
Swiss Can Act Earlier Than European Peers
The Swiss National Bank (SNB) also gives its policy decision today. The Swiss will likely follow in the footsteps of the ECB, but they could act slightly earlier than European peers given that inflation is now below target and letting the franc giveaway some strength wouldn’t be bad for the Swiss economy and exporters – especially after the Kering’s warning that Asian customers are not necessarily hungry for expensive European brands right now. The EUR/CHF rebounded more than 4% since the beginning of the year, but the pair has not even reached the minor 23.6% Fibonacci retracement on 2021 to 2024 selloff - the period where the SNB decided to let the franc strengthen to fight inflation. Therefore, there is a good upside opportunity for the EUR/CHF, if of course, the SNB remains convinced that inflation in Switzerland is under control. For now, it is.
Reddit Starts Trading Today!
Reddit will start trading on NYSE today after having raised $748 million priced at $34 per share – which is the top marketed range. Fundamentally, Reddit is not Nvidia (NASDAQ:NVDA) – huh – they haven’t had a profitable year since the 2005 launch and the user growth has stalled near 500 mio for the past three years. Therefore, Redditers should give a supportive hand to make buzzy headlines. Note that the weather conditions are ideal for a first day facing the public – especially for speculative trades. The Fed has been accommodative, risk appetite is strong and there are no clouds in the sky. So, the Redditers could enjoy the ride.