Fed statement after rate hike suggests a pause in rate rises will be data-driven

The Fed delivered a much-anticipated quarter point rate rise yesterday but not the hoped for and reassuring words on a “pause” in further rate hikes, or better still rate cuts in the second half of the year. Major indices fell into the red and the VIX, Wall Street’s fear index, pushed back into the 20's (21.3 intraday) for the first time since late March. The gold price hit an all-tine high of $2,070. Inflation remains the major risk factor. Tomorrow’s US Payroll numbers will be scrutinized for signs of weakness in what continues to be an otherwise strong labor market.

Our global strategist Vincent Deluard recently published his view that the US economy will avoid recession in 2023, in part thanks to strong fiscal stimulus at the State and Federal level. This optimistic view comes with a cost, however, in the form of stubbornly high inflation. Financial markets could face higher short rates for longer, and the need for longer dated bond yields; this in turn, could challenge rich equity market valuations.

Fed nixes hopes of early rate cuts after rate hike

The Fed opted to raise rates another 25 basis points yesterday, as expected, bringing its benchmark interest rate to a range of 5.00% - 5.25%. Noteworthy takeaways came in Jerome Powell's press conference, dashing traders' hopes of rate cuts later in 2023; he said that the committee believed "inflation is going to come down not so quickly", and that "it would not be appropriate to cut rates and we won't cut rates."

This shouldn't have been that much of a surprise. Powell has consistently reiterated the Fed's commitment to battling inflation and not repeating mistakes of the early 1980s by pivoting too soon, despite market optimism that the Fed would start cutting rates in the near future. On the bright side, the Fed left out prior language of anticipating further rate hikes ahead in their statement, perhaps suggesting that they will now pause after yesterday's hike.

Nonetheless, Powell said "a decision on a pause was not made today", and that the Fed was still "prepared to do more" if needs be, on the basis of economic data for signs of progress in reducing inflation in the month ahead.

European Central Bank follows the Fed with a quarter point rate rise

The European Central Bank hiked rates by 25 basis points today, bringing their benchmark interest rate to 3.25%. Unlike the Fed, however, ECB President Christine Lagarde was definitive in saying "we are not pausing - that is very clear" at her subsequent press conference. This morning's Euro Area Producer Price Index (PPI) did show improvement to inflationary pressures in Europe, with March showing a 5.9% year-on-year climb, the lowest rate seen since March 2021. With a target of 2%, however, there's still clearly more work to be done.

Regional US banks plunge (again)

Banking sector fears are weighing on the market yet again today, with PacWest Bancorp's stock plunging 60% in a day – close to 90% of its value since Silicon Valley Bank's failure in March – after confirming reports that the company is weighing its "strategic options", sparking fears of another regional bank failure. Fear is spreading throughout the sector, with shares of  Comerica and Zions Bancorp both down around 15% at the time of writing. First Horizon Corp's shares are also under serious pressure today, down roughly 40%, following the announcement that TD Bank had terminated their agreement to take the company over. Despite attempts to assure the market that the worst is over, including comments yesterday from Jerome Powell, it seems the jitters of the banking sector are here to stay for the time being.

Indices fall, bonds rally, VIX rises

• At the time of writing, the broad S&P 500, NASDAQ and Russell 2000 indices were -0.7%, -0.4% and -1.9%,respectively, with the latter pointing to a sell-off in smaller cap stocks and turmoil in the Regional Banks
• The VIX, Wall Street’s fear index, traded up to 21.3, heading back towards the year-to-date high of 29 back in March when the first banking crisis hit
• The dollar index was flat at 101.3, with the Euro/Dollar off by 0.4% and Dollar/Sterling up by 0.2%
• Yields on 2- and 10-year Treasuries fell sharply to 3.71% and 3.31%, respectively(bonds love recession fears)

Gold rallies to new highs, oil unchanged

• Gold prices hit an all-time high of $2,070 per ounce (intraday), up by 1.0% on the day at $2,60 at the time of writing
• Crude oil prices were unchanged at $68.8 per barrel, marking a roughly 10% drop this week
• Agricultural commodities were mixed, though the wheat complex is rebounding after its recent slide
• Weakness in crude oil continued overnight, though prices have rallied back from their lows with the nearby WTI contract trading near $68 at the time of writing,
• Agricultural commodities were mostly lower on profit-taking after grain prices surged yesterday on the back of escalations in the Russia/Ukraine conflict

Jobless claims and labor costs sending mixed signals

• Initial jobless claims rose by 13,000 to reach 242,000 last week, slightly above market expectations of 240,000
• The 4-week average rose by 3,500 to 239,250, another potential sign of a softening labor market.
• Continuing jobless claims falling by 38,000 week-on-week to reach 1.805 million.
• Challenger Job Cuts data for April, measuring the change in the number of job cuts announced by employers, fell 25.3% from last month prior to come in at 66,995, the lowest in 2023
• Highest cuts were seen in the retail, tech, and consumer manufacturing sectors
• Unit labor costs in the Non-farm business sector rose sharply in the first quarter of 2023 according to this morning's preliminary data, increasing at an annualized rate of 6.3%, well above expectations of a 5.5% increase
• First quarter unit labor costs were up 5.8% year-on-year, down from 6.3% annualized growth in the fourth quarter of 2022, providing a silver lining for the inflation outlook
• First quarter productivity also saw a worse than expected result, falling 2.7% compared to

Russia accuses US of Kremlin drone attack

• Amping up the rhetoric, Dmitry Peskov, press secretary for Russian president Vladimir Putin, accused the US of being behind the attempted drone attack on the Kremlin this week without providing any evidence
• This follows hard on the heels of yesterday's claim that Ukraine was to blame, and Peskov added that Russia knows decisions about such actions are "made not in Kyiv but in Washington"
• Global tensions like this add risk to financial markets

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com