The market is fighting the Fed, should you?

Mid-week market update: The option market was pricing in a daily equity market swing of 1.6% ahead of today’s events, namely the May CPI report and the FOMC decision. Even though the S&P 500 gained strongly today, the move could be said to be disappointing in volatility terms.


The bullish tone was set this morning by the softer than expected CPI report. Stocks gained but didn’t react much to the FOMC decision, despite the hawkish tone of the Summary of Economic Projections. Bond prices held above a key resistance level, and the USD weakened, indicating a risk-on tone.



The market is fighting the Fed, should you?



A soft inflation report

The May CPI report was much softer than expected. May core CPI (blue bars) came in at 0.16%, which was cooler than the forecast consensus of 0.3%. Supercore services (red bars) was also weak. These are all welcome signs of moderating inflation readings. The one caveat is this is only one data point and don’t necessarily represent a sufficient trend for the Fed to be confident about cutting rates.



As I’ve pointed out before, the Citi Inflation Surprise Index has been coming down for most major economies. It was therefore no surprise that other central banks, such as Switzerland, Sweden, the ECB, and Canada, have initiated rate cut cycles.