Macro Insights: Can the Fed stall the rally in equities? Macro Insights: Can the Fed stall the rally in equities? Macro Insights: Can the Fed stall the rally in equities?

Macro Insights: Can the Fed stall the rally in equities?

Macro 4 minutes to read
Charu Chanana

Market Strategist

Summary:  US inflation cooled further in May, sparking a risk-on in markets despite core inflation still remaining sticky. Focus now turns to the FOMC meeting and a hawkish hold remains the most likely scenario. But keeping a July rate hike in play will be a key task for the FOMC today and a data-dependent approach may not prove enough to turn around the sentiment in equities.

Inflation: Slowing momentum, but mixed details remain open to interpretation

Headline inflation in the US has seen a substantial slowdown to 4.0% YoY from 4.9% YoY in April. The core, however, was slightly higher than expectations at 5.3% YoY (exp. 5.2%; prev. 5.5%) but stayed in-line on a MoM basis coming in at 0.4% (exp. 0.4%; prev. +0.4%). Clearly, this print offers a read for every policymaker, whatever their policy preference may be. This is why a pause at the June meeting still remains the most likely outcome, which would be an extension of the Goldilocks we remain locked in.

For those who tend to read this inflation release as dovish, clearly the core measure remained underpinned mainly by shelter and used car prices. Reports have recently suggested that rental prices are sliding in the US, primarily on the West Coast. According to a report from Redfin, the median rent in the US was $1,995 in May, dropping 0.6% YoY. This could start to weigh on shelter costs. Meanwhile, Mannheim used car auctions and new vehicle prices are also on a decline, suggesting little scope for these two components to continue to push core inflation higher in the coming months.

But from a hawkish person’s standpoint, we can argue that the decline in headline inflation was mainly energy driven and thus extremely fragile. Any reversal in energy prices could bring back the ugly price pressures that we saw last year. Therefore, taking comfort in this downtrend of inflation may be premature.

FOMC: A data-dependent approach may not be enough

The most likely set up going into the Fed meeting remains to be one of a “hawkish hold”. No doubt there are still reasons for the Fed to hike rates – considering the labor market strength or also the easing financial conditions given the pace of gains in equities. But the Fed usually prepares the market for its outcomes and lack of WSJ articles on why a hike may be considered suggests a pause is still warranted.

But the bigger question is then on whether we will get the next rate hike in July? It is difficult to see what can bring that if inflation softens further in June unless labor and wage data surprises considerably to the upside. But recalling the signals that we got from the retail sector earnings in the first quarter, there could be further concerns on consumers pulling back spending which would further erode the chance of another rate hike.

Dovish interpretations of today’s meeting could come from economic projections. If the growth forecast is adjusted higher with banking sector and debt ceiling risks now on the backburner, while inflation forecasts are adjusted lower given the recent trend. These will need to be balanced with enough hawkish commentaries to keep a July rate hike in play. Any dissenting votes at today’s decision will be worth monitoring as well. Members like Lorie Logan, Neel Kashkari, Christopher Waller and Michelle Bowman have been voicing hawkish sentiments. But a pure data-dependent approach from here will do little to cut short the equity rally.


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.