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Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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FOMC gives dollar a minor bump, SNB opts for smaller cut.
John J. Hardy
Global Head of Macro Strategy
Summary: The FOMC has the Fed in a more stagflationary stance, freezing the forward Fed expectations for now and driving a minor further squeeze on short USD positioning. Switzerland’s SNB today opted for the smaller 25 basis point cut, but warned on moving against currency strength.
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Key developments and comments:
The FOMC meeting delivered a mixed message, with some very modest adjustments to the policy statement suggesting very slightly less concern about the economic outlook than the previous statement (which was from May 7 and came only a few weeks after the Liberation Day swoon in markets and general sentiment). The new staff economic projections showed growth revisions revised lower for this year and next, with inflation revised higher for all of 2025-2027 and the Unemployment rate likewise revised slightly higher for 2025-2027 (to 4.5% for this year and next versus 4.4% and 4.3% in March, respectively). This suggests a modestly uncomfortable stagflationary outlook that Fed policy will have a tough time addressing, hence little drama in rates markets. US treasuries initially rallied, only to end the day mostly unchanged. The median dot plot of Fed forecasts hardly shifted either, but a slightly new pattern has developed for the forecasts for rates at the end of this year, as it looks as though two camps are forming among Fed members, those that forecast the rate should remain unchanged through the end of this year and those that believe at least two cuts will be appropriate. In the press conference, Fed Chair Powell stressed uncertainty and the need for patience to see what effects tariffs and volatile sentiment are having, which kept anticipation of a July rate cut low.
USD reaction to FOMC: the US dollar ended up rising across the board as US treasury yields remained frozen in their tracks and perhaps as stale USD shorts were squared on the ensuing price action. If so, wondering whether the reaction has much potential for follow-through by the end of the week (see more below in EURUSD chart.) Today is a holiday in the US
Chart: EURUSD
It’s a bit tough to identify technical areas back in the old range if EURUSD loses its grip on the 1.1400+ level. I’m still reluctant to believe that the failure of the 1.1500 area to hold will touch off a major sell-off – so let’s see if the 1.1400-1.1450 zone can hold for now, otherwise we risk a pullback to 1.1280, while a smart reversal back above 1.1500 would rejuvenate the bullish case.
Meanwhile, the US data ahead of the FOMC were once again generally negative, with weekly initial jobless claims only improving marginally while continuing claims improved only marginally from the 3-year highs. Elsewhere, the collapse in May Housing Starts points to growing risks in the US housing sector.
Elsewhere
- The Australian dollar surged after a mixed Australian jobs report, which showed overall payrolls dipping slightly, but full time payrolls growing. AUDNZD rose above 1.0800, a level it has not closed above in more than three weeks. AUDUSD has changed direction every day for the last seven trading days running – that can’t continue for much longer.
- Sweden’s Riksbank surprised dovish, not only cutting to take the rate to the round 2.00% level, but suggesting that further easing is in the works and lowering all inflation forecasts to 2.0% for the entire 5-year forecast period. This sets up excellent longer term opportunities to get long of SEK again versus EUR and perhaps CHF on the eventual incoming growth stimulus from the German fiscal expansion. The question is whether EURSEK bears should get involved here or not until the 11.20-25 zone or wait for a reversal pattern to develop.
- Switzerland’s SNB decision out just before screen time and Schlegel and company have decided to go with the 25 basis point cut to a 0.0% policy rate, which the majority of observers expected. This is nominally hawkish after a significant contingent argued in favour of the SNB taking rates to negative all in one go today. Accompanying that decision are all manner of measures aimed at discouraging CHF strength, including charging banks an extra 0.25% if their “sight deposits” are above a certain threshold and saying that currency intervention is an option.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
The US dollar has backed up, but is far from shifting into a positive trending stance, while SEK has turned negative, but the Riksbank reaction may be overdone on any whiff of the European growth outlook improving. Elsewhere readings are largely muted, with the EUR rally still intact.
Table: NEW FX Board Trend Scoreboard for individual pairs. Among the major individual pairs, the USDJPY status one of the more interesting if it achieves a break above the local range. As well, the GBPUSD bull trend is under siege after a remarkable 92 trading days.
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