The Bar To Hike Again Is Exceptionally High, While The Bar To Cut Is Relatively Low -

The Bar To Hike Again Is Exceptionally High, While The Bar To Cut Is Relatively Low

May 21, 2024Jeremy ParkinsonFinance, No picture0

Image Source: UnsplashMARKETSAmid a lack of Tier 1 economic data, U.S. investors found momentum Tuesday afternoon as they eagerly anticipated Nvidia Corp.’s (NVDA) earnings report. Nvidia, a key player in the artificial intelligence boom, has been central to the current bull market. Additionally, traders were looking ahead to the release of the Federal Open Market Committee (FOMC) minutes.Overall, the S&P 500 saw a modest gain of 0.3%, the Nasdaq Composite rose by 0.2%, and the Dow Jones Industrial Average added just 66 points, or 0.2%.As we approach the release of the Federal Open Market Committee (FOMC) minutes, Federal Reserve officials have given no indication of any unexpected hawkish surprises within the soon-to-be-published minutes. Fed Governor Christopher Waller, a significant market influencer, has hinted that the possibility of rate cuts might be on the table this year, but only if economic data shows a significant softening over the next three to five months. This aligns with the market’s anticipation of a series of rate cuts before the end of 2024. Despite the persistent high inflation, the softening economic data suggests that the U.S. labour market is moving towards a phase that could support rate cuts. The narrative is quite simple. The bar to hike again is exceptionally high, while the bar to cut is relatively low (two negative NFP prints would surely do the trick).Throughout 2022 and 2023, the Federal Reserve’s primary focus was controlling inflation, which had become the central bank’s top priority due to rapidly rising prices. However, as inflation has cooled, Fed officials are again factoring the job market into their policy decisions. This shift indicates a broader approach to monetary policy, considering both price stability and employment levels.Utility stocks finished in the green, continuing a hot streak for a sector that has emerged as an unexpected beneficiary of the AI boom. According to sector analysts, AI data centers could account for 10.9% of U.S. electricity demand by 2030, up from 4.5% today. Suppose power needs to grow as much as anticipated. In that case, this will necessitate more power plants, transmission lines, and other infrastructure investments, leading to increased returns for the companies that build them. This projected growth highlights the critical intersection of AI technology and the utility sector, presenting significant opportunities for investors and infrastructure developers. Indeed, the AI ripple effect keeps going on and on, just like the Energizer Bunny.The recent surge in utility stocks marks a significant turnaround from the previous year when the Federal Reserve’s interest-rate hikes created an environment ripe with high-yield investment opportunities. This shift has turned traditionally risk-free Treasurys into attractive cash machines, diverting investors’ attention away from utilities and their historically reliable dividends. However, the recent success of utility stocks signals a renewed confidence in the sector, hinting at the potential for future growth and stability.While Nvidia has stood out as that hardware store on the prospecting hill — the modern-day Levi Strauss. The build phase may also benefit the ‘shovel providers’ of this AI’ gold rush’ — the companies that provide the computing power and tools necessary to build the models needed to compete.FOREX MARKETSAs we approach next week’s Personal Consumption Expenditures (PCE) report, currency markets remain in a narrow range. Nowadays, differences in key central bank policy expectations are insufficient to drive significant foreign exchange (FX) movements. Since the start of 2023, EUR/USD has stayed within the 1.0500-1.1000 range approximately 90% of the time. G10 FX volatility is decreasing once again as markets anticipate lower Federal Reserve policy rates, which could align the Fed more closely with the rate pricing of other major G10 central banks.Once we enter the 8-week Fed rate cut windows, we can anticipate the currency trending towards the current range’s upper boundary (EURUSD 1.1000, USDJPY 150). However, beyond that point, it could become a growth narrative, influenced by which central banks need to cut rates the least and which currency will perform the best.OIL MARKETSOil prices are at the lower end of their recent range as attempts to rally are reportedly being stifled by discussions hinting at a “higher for longer” stance from the Federal Reserve.The narrowing spread between Brent and WTI in May and the subsiding geopolitical concerns that boosted oil prices in April provide bearish indicators for the oil market. Additionally, the significant spare capacity held by OPEC, estimated at 5.52 million barrels per day according to the International Energy Agency, adds to the bearish sentiment. This surplus capacity and increased production from countries such as Guyana, Canada, and Brazil are anticipated to alleviate supply pressures and reduce volatility within oil markets.On the US front, commercial crude stocks are anticipated to have decreased by 2 million barrels during the week ending May 17, marking the third consecutive weekly decline in inventory. This drawdown is attributed to higher demand for crude from U.S. refiners, evidenced by a 1.9% increase in crude inputs during the week ending May 10, reaching a 17-week high of 16.255 million barrels per day, as the Energy Information Administration reported.