FOMC In Focus As Geopolitical Noise Continues

WHERE WE STAND – Back to the grindstone we go, after a couple of days off desk.

I suppose that my timing wasn’t especially great on that front, given how my absence coincided with a significant ratcheting up in geopolitical tensions in the Middle East, as Iran and Israel continue to trade blows. Then again, given how easy it is to get caught up in headline noise at a time like this, following affairs from affair and not being glued to the terminal makes it much easier to discern some signal from the cacophony of headlines.

On which note, I think we’re probably now past the point of ‘peak fear’ from a purely financial markets perspective. While kinetic exchanges continue, this has now been priced in, and was last Friday. As I noted then, markets are always very quick to price in geopolitical fear, but equally quick to fade it again.

We must then ask what may lead to an adverse market reaction from here on in; i.e., a renewed rush into safe havens, and fresh downside in equities. I see three scenarios that could lead to such an outcome – the targeting of Iranian oil export infrastructure; issues in the Strait of Hormuz preventing the flow of crude out of the Middle East; or, an outright push towards regime change in Iran. For the time being, all three of these seem relatively unlikely.

Consequently, participants should be able to continue to shrug off geopolitical events, and re-focus rather rapidly on the market drivers with which we have all become far too familiar. Namely, progress towards trade deals, strong earnings growth, and solid underlying economic data.

Arguably, progress towards those trade deals remains more sluggish than desired, especially with the Middle East tensions having rather scuppered plans for trade negotiations to take place on the sidelines of the G7 summit. Still, the overall direction of travel still leads towards agreements being made, and towards calmer rhetoric prevailing, particularly amid reports that the US-China trade ‘truce’ may be extended for a further 90 days upon its mid-August expiry. I feel that won’t be the last time we read that particular headline.

Taking all of that into account, I see little-to-no reason to be giving up on the bull case for equities at this stage, with the path of least resistance continuing to lead higher, and dip buying remaining my ‘modus operandi’.

That said, given elevated tensions, I still see a case for gold, with the shelter offered by bullion remaining attractive in such an uncertain environment. This demand for safety adds to the ongoing desire, particularly from emerging markets, to continue diversifying FX reserves away from the USD, which in turn creates a rather potent cocktail for further upside.

As for yesterday, fundamental developments continued to take a back seat compared to ongoing geopolitical tensions. That may also have something to do with the fact that the developments in question weren’t especially interesting. The BoJ kept rates steady, while halving the pace of their pullback from the JGB market, in line with expectations. Stateside, headline retail sales fell a chunky 0.9% MoM last month, though the bulk of this decline was driven by a fall in car sales. The more important control group metric, which broadly represents the basket used to calculate GDP, actually saw sales rise 0.4% MoM, leaving the net effect of the data as, essentially, nil.

Nevertheless, markets did trade in somewhat softer fashion for most of the day – stocks paring some of Monday’s substantial gains, Treasuries ticking firmer across the curve, and gold finding some modest demand. The FX space, though, remains a complete mess, with G10s continuing to trade in tight ranges, mean reverting in relatively rapid fashion. I shan’t be holding my breath for these ranges to give way in the short-term, even if my bias remains towards a weaker greenback in the longer-run, by virtue of trade agreements or otherwise.

LOOK AHEAD – While focus will remain on geopolitical developments, today is also ‘Fed Day’!

Don’t go expecting Powell & Co to rock the boat too much, however, with the FOMC still firmly in ‘wait and see’ mode, and the target range for the fed funds rate set to be maintained at 4.25% - 4.50%, in a unanimous vote. The accompanying policy statement is also likely to be broadly unchanged from that issued last time out, with underlying growth still ‘solid’, and uncertainty around the outlook remaining elevated.

The FOMC’s updated Summary of Economic Projections (SEP) provides a bit more intrigue, though forecasting a forecast at a time like this is a rather thankless task! Still, inflation expectations should be nudged higher in the short-term, and growth expectations similarly nudged lower, reflecting the impact of tariffs through the remainder of the year. I wouldn’t be at all surprised, though, if the median 2025 ‘dot’ moved higher to signal just one 25bp cut this year, particularly with it only taking 2 participants to move their ‘dot’ above the current median, for the new median to be dragged higher as well.

Chair Powell, meanwhile, will likely stick resolutely to his recent script at the post-meeting press conference, stressing that there need not be any hurry to adjust rates, and that policy remains ‘well-positioned’ for the time being. In short, it’s tough to see the FOMC tonight being a game-changer in the grand scheme of things, with my expectations remaining for just one 25bp cut this year, being delivered in December.

Elsewhere, today, we get the latest UK inflation figures this morning, with headline CPI set to dip to 3.3% YoY in May, from 3.5% YoY last time out. Again, though, this is unlikely to alter the BoE’s thinking, with the ‘Old Lady’ set to hold Bank Rate steady tomorrow lunchtime.

We also have a bit of a data deluge from the US today, with housing starts, building permits, and the weekly jobless claims stats due, the latter a day early due to the Juneteenth holiday tomorrow. The continuing claims print bears watching particularly closely, given the cycle high printed last week.

Finally, not wanting to be left out, there are a frankly ridiculous 8 ECB speakers on the docket. Though, thankfully, none of them are likely to say anything particularly interesting.