US Stocks Rise Ahead of Fed – Nasdaq up 0.5%
US equity markets edged higher overnight, with investors briefly shifting their focus away from ongoing geopolitical tensions in the Middle East to position ahead of the upcoming policy decision from the Federal Reserve. Gains across the major indices were modest, with the Dow Jones rising 0.10% to 46,993, the S&P 500 adding 0.25% to 6,716, and the Nasdaq outperforming with a 0.47% advance to 22,479. In currency markets, the US dollar continued to soften, with the DXY slipping 0.25% to 99.58. Bond markets reflected a degree of indecision, with the 2-year Treasury yield ticking up 0.3 basis points to 3.674%, while the 10-year yield eased 1.8 basis points to 4.198%, suggesting a modest flattening of the curve. Commodities remained a key area of focus, with oil prices once again pushing higher amid persistent supply concerns linked to the Middle East conflict. Brent crude climbed 3.34% to $103.57, while WTI gained 2.66% to $95.99. In contrast, gold was relatively subdued, trading in a tight range and finishing marginally lower on the day, down 0.02% at $5,004.38.
Fed in Focus Today – and Markets Could Get Messy (er!)
While market pricing continues to point overwhelmingly towards a hold at today’s Federal Reserve decision—with implied probabilities still sitting above 99%—the focus for investors will be firmly on the accompanying communication rather than the rate outcome itself. The policy statement, updated economic projections, and the Chair’s press conference are all expected to be key catalysts for volatility, particularly across FX markets. Driven mainly by the conflict in the Middle East, the market is now expecting US rates to remain “higher for longer” as inflationary concerns have risen considerably since the start of the war. As a result, market participants have begun to reassess the outlook for policy easing, with some even questioning whether the next move from the Fed could ultimately be a rate hike later this year. This marks a notable shift from only a few weeks ago, when markets were assigning a probability of rate cuts as early as June or July. Those expectations have since been pared back significantly, with current pricing implying approximately a 21% chance of a June cut and around 32% for July. Should the Federal Reserve deliver a more hawkish message—particularly through the updated dot plot—these probabilities are likely to be further repriced lower, providing additional near-term support for the US dollar.
Central Banks Come into Focus Today
Looking ahead, the macroeconomic calendar is relatively light through the early part of the trading day, but volatility is expected to pick up sharply during the US session. Alongside US PPI data (exp +0.3% m/m, Core +0.3% m/m) and Weekly Oil Inventories (exp 1.5mio barrels), central bank decisions will take centre stage. The Bank of Canada is set to announce its latest rate decision earlier in the day, with a hold at 2.25% firmly priced into the market, before all eyes turn to the Federal Reserve’s policy announcement and subsequent press conference towards the end of the session. Again, the FOMC is expected to keep rates on hold in light of still-high inflation data and a resilient jobs market; however, forward guidance from the dot plot, statement, and press conference could really hit markets, especially if they take a more hawkish tone on the back of the conflict in the Middle East.
