Fundamentals Improve For Interest Rate Market
STOCK INDEX FUTURES
Stock index futures are higher as signs of slowing economic growth and falling commodity prices eased expectations over how high the Federal Reserve will raise interest rates to rein in inflation.
Recent economic reports have indicated the U.S. economy, and potentially inflation, may be beginning to cool off.
The third estimate of gross domestic product in the first quarter declined 1.6% when down 1.4% was expected and personal consumption expenditures increased 1.8% when up 3.1% was anticipated.
The main event today is Fed Chair Powell’s 8:00 central time speech at the European Central Bank’s forum.
The rate of inflation remains the key driver to this market. A likely bottom could come when there are indications that the rate of inflation is slowing, which could influence the Federal Reserve to become less hawkish.
The euro currency is lower after European Central Bank President Christine said the bank would raise interest rates gradually.
Inflation in Germany, as measured by the Harmonized Index of Consumer Prices (HICP), fell to 8.2% on a yearly basis in June’s flash estimate from 8.7% in May. This is lower than the market expectation of 8.8%. On a monthly basis, the HICP declined by 0.1%.
INTEREST RATE MARKET FUTURES
Loretta Mester of the Federal Reserve today said the Fed is just at the beginning of raising interest rates.
There is an 82.0% probability that the Federal Open Market Committee will hike its fed funds rate by 75 basis points and a 18.0% probability that the rate will increase by 50 basis points at the July 27 meeting. Yesterday the probability of a 75 basis point hike in the fed funds rate was 93.0%.
Currently the Federal Reserve’s focus is on inflation, while a slowing economy will be problem for the Fed to deal with later.
Economic growth is slowing, maybe even sooner than expected, which should allow the Fed to soften its policy stance at some point.
Financial futures markets are now predicting the Fed could return to accommodative late in 2023.
The fundamental and technical aspects of the interest rate market futures are improving.
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