Fed Day Could Turn Out to Be the Least of Our Concerns
A likely outcome today is that we get more of the same ... but given all else that is unfolding in the world that might be what the market prefers.
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While we were hoping for Middle East tensions to improve, Iran’s Supreme Leader Ayatollah Ali Khamenei said he won’t yield to Israel and defied Pres. Trump’s calls for an “unconditional surrender.”
This raises questions as to whether the U.S. would join the Israeli attacks, a move that could improve the odds of permanently ending Iran’s path to a nuclear weapon, or look to foster a diplomatic solution. We’ll continue to follow these developments closely to see if it devolves into a wider conflict that could elevate oil prices further, making for an inflation tailwind in the process, or if calmer heads prevail.
In the meantime, the market will certainly focus on the Fed’s policy meeting outcome later today, which is not expected to deliver a rate cut. But as we’ve discussed the updated set of economic projections (SEP) and Fed Chair Jerome Powell’s comments as well as his tone will also be in focus. The more we think about it, the more likely Powell will acknowledge recent inflation and employment data, but reiterate the Fed is looking for more data so it can best determine its next step with monetary policy.
As we see it, that means the Fed’s updated SEP will show some changes to 2025 gross domestic product and personal consumption expenditure expectations, but continue to show two quarter-point rate cuts for this year. Given recent comments from the likes of Atlanta Fed Pres. Raphael Bostic and others, if that is what the updated SEP shows, odds are the market will react positively. If Powell’s tone is more hawkish, that could roil a market that is contending with the Israel-Iran conflict, extending trade deal timelines, and questions over Trump’s “big, beautiful” budget that looks to slip past its July 4 timeline.
Our position has been and remains that the longer we go without final trade deals and their details, the more likely we see the impact of tariffs on inflation. And while recent jobs figures have softened compared to levels seen in the back half of 2024, the April and May employment report figures were above the year-to-date average of 124,000 jobs. Mixed with rolling gross domestic product forecasts from the Atlanta Fed, St, Louis Fed, and New York Fed that average out to 2.4% for the current quarter, Powell will argue the Fed can take its time and see to what extent tariffs become an inflation tailwind.
Putting it all together, the market is once again focusing on the Fed, but a likely outcome is we get more of the same. Given all else that is unfolding, that would be a welcomed outcome by the market. Should that be the one we get this afternoon, and it pushes the market higher and some of our overbought positions even higher, some prudent profit-taking may be around the corner.
Coming up, we’ll share our reaction to Marvell’s MRVL Custom Silicon Investor Event yesterday, one that is leading Wall Street firms to up their price targets on the shares.
At the time of publication, the Pro Portfolio was long MRVL.
