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Will a Slowing Economy Bring a Pause to Interest Rate Hikes?

Miguel A. Rodriguez
Miguel A. Rodriguez
06 June 2023

Economic data showing a slowing US economy and a tight job market may present the Federal Reserve (Fed) with a dilemma on whether to raise interest rates one more time during the June meeting or whether to practice the wait and see tactic with a pause in hikes. 

Yesterday’s trading in US markets was mixed, with the DowJones30 index down and the Nasdaq index up as all eyes are on the Fed’s meeting next week. 

After back-to-back rate hikes since last spring, investors are trying to predict what the Fed will do next. Data indicate that the economy is slowing down, but the employment market is still tight, making the Fed's decision-making more difficult. 

Despite significantly higher-than-expected nonfarm payrolls figures, stocks climbed on Friday. However, wage growth last month slowed as the unemployment rate increased to 3.7%. This offered some investors hope that the Fed could decide to stop hiking rates at its next meeting because ultimately, the Fed may be concerned that pay gains will pick up speed and lead to salary inflation. 

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A further indication that the economy is slowing down, particularly in the services sector, which has so far withstood the slowdown the most, is the release of the ISM yesterday, which was below expectations as it dropped to 50.3. As a result, the market is placing a 75% probability on the pause at the next Fed meeting. 

The US Congress's approval of the debt ceiling deal, which removed the danger that had been looming over the market for weeks, is another element that has contributed to the market's improved risk sentiment.   

However, things are different in Europe. In addition to the European Central Bank (ECB) officials' unwavering commitment to raising interest rates, the bank’s president, Christine Lagarde, hinted yesterday that they might stop reinvesting in the bonds they hold on their balance sheet. This possibility caused sporadic spikes in the yields of European bonds and helped the EUR/USD pair advance and move above the 1.0700 level. 

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The outcome of the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, weekend summit was another topic of discussion yesterday. Despite Saudi Arabia's unilateral decision to reduce production by one million bpd for at least a month, oil fell once again and once more rejected the resistance area around 73.70 following a brief rebound. The expectations of lower global demand due to the slowdown in the economy and the lack of confidence that OPEC+ will stay true to its decision, as there is no widespread agreement to reduce production and some nations appear to be able to continue increasing it despite previously falling short of their production quotas, are the main causes of crude oil's weakness. 

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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.