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Fed expected to pause, but the "dot plot" will garner the most attention

Commentaries & Views

This morning the BLS (Bureau of Labor Statistics) released the most current data on the inflation rate for May, it revealed that inflation has cooled to a level not seen in over two years. Cooling inflation makes the likelihood that the Federal Reserve will not raise rates tomorrow extremely high. According to the CME's FedWatch Tool, there is a 91.9% probability that the Fed will take its first-rate hike pause after raising rates for the last 10 consecutive FOMC meetings.

The Consumer Price Index increased by just 0.1% for the month which brought the annual level to 4%, down from 4.9% in April. However, the numbers were quite different for the core CPI which excludes both food and energy costs. The core CPI increased by 0.4% on the month and 5.3% from a year ago. A consensus by Dow Jones was spot on in their estimates with the actual numbers coming in in line with predictions.

The report also revealed that the most current CPI numbers were welcomed by the American workforce. This is because average hourly earnings when adjusted for inflation rose 0.3% on the month. On an annual basis, real earnings are up 0.2% much different than the negative real change for a large portion of the two-year inflation surge.

One major difference with today's CPI report is the differential between "headline" and core inflation rates. Up until recently "headline" inflation would come in above the core inflation numbers.

Today's report had a strong influence on major asset classes within the financial markets. Gold, silver, and platinum all traded lower on the day. Major indices in the United States closed moderately higher. The dollar also lost value trading 0.346% lower taking the dollar index to 103.285.

As of 4:52 PM EDT, gold futures basis the most active August contract had a decline of -$13.20 or -0.67%, and is currently fixed at $1956.50. Silver basis the most active July contract lost -$0.33 or 1.37% and is fixed at $23.73.

The consensus amongst economists and analysts is that although there is almost a certainty that the Federal Reserve will not raise rates tomorrow, there remains a likelihood that they will implement a " skip" in which they might raise rates at the next FOMC meeting in July. According to the CME's FedWatch Tool, there is a 62.5% of ¼% rate hike at the July 26 FOMC meeting, a 33% probability that the Fed will continue to pause rate hikes, and a 4.5% probability that they will raise rates by half a percent.

With much certainty surrounding tomorrow's decision by the Fed, market participants are laser-focused on the information available in tomorrow's "dot plot," a component of the Fed's quarterly Summary of Economic Projections (SEP). Analysts will deeply glean any information about the economic projections by the central banks for the second half of the year. They will also listen closely to Chairman Powell's press conference for projections on inflation levels throughout the rest of the year.

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Wishing you as always good trading,

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