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Stock Market Fluctuates as Markets Bet on Final Fed Rate Rise

Miguel A. Rodriguez
Miguel A. Rodriguez
19 May 2023

As the Federal Reserve’s (Fed) next policy meeting draws close, bets on another interest rate hike mount, causing swings in the stock market. The release of jobless claims in the US indicates that the labor market remains tight. 

Treasury yields increased yesterday, particularly those at the short end of the yield curve. The stock market also experienced a volatile day, with gains in the Nasdaq technology and slight declines in the Dow Jones 30, largely because of speculation that the Fed will need to raise interest rates once more as inflation remains high. At least, this was a major topic of discussion in the financial media. 

Bets on a rate increase in June increased to over 40%, according to the interest rate curve and the interest rate futures market.  

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The case for a pause next month is questionable, according to Fed Bank of Dallas President Lorie Logan, who added to this market sentiment. On the other hand, Fed official, Philip Jefferson, expressed a willingness to wait and observe how the economy is affected by the tightening of policy during the past year. 

In truth, the sudden movement in interest rates that has been observed, particularly in the short term up to the 2-year bond, is most likely the result of investors selling these investment securities (treasury bills and treasury bonds) in anticipation of the remote possibility that a deal will not be reached to raise the debt ceiling and that the US government will go into default. 

Given that no essential economic data has been released that could have altered economic forecasts, it does not seem to make much sense to a large portion of market analysts to attribute these movements to the fact that the market anticipates new interest rate rises after there was talk of interest rate cuts for September only a week ago. 

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While it is true that the employment statistics continue to show some strength, as was the case yesterday with the number of unemployment claims, this is a trend that hasn't changed in recent weeks; it is still the same.  

Because of gold's inverse relationship to the US Dollar, it recently hit new lows, falling to the $1,950/ounce support level. As a result of the recovery in bond yields, the US Dollar has continued to strengthen. 


DMO 19.05.2023 graph.png

Sources: Bloomberg, Reuters 






Miguel A. Rodriguez
Miguel A. Rodriguez

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.