🥵 The Fed’s sweating

🔍 The focus this week: Tough breaks

Every three months, the Federal Reserve (the Fed) releases a bunch of projections – including the closely watched “dot plot”, which shows where members see interest rates moving. As recently as mid-March, those dots showed that officials still saw three rate cuts this year, despite an unexpected perk-up in inflation. But a lot has happened since then, and those projections are starting to look unrealistic.

First, March’s inflation report came in hotter than expected across the board, with the annual pace of consumer price gains accelerating to 3.5% – its highest in six months. Then, a blowout labor market report showed the US economy adding 303,000 jobs in March – the 39th straight month of gains and 50% more than people expected. (And if that wasn’t blockbuster enough, the figures for the previous two months were also revised upward.) Finally, despite the US’s first-quarter growth figures missing expectations, they still showed the economy growing at a modest rate.

So with inflation drifting away from the Fed’s 2% target and the US economy and labor market clearly not in need of the boost that comes from lower borrowing costs, investors virtually all expect the central bank to hold rates unchanged at a two-decade high on Wednesday. In fact, they’re now betting on just one or two 0.25-percentage-point cuts for the entire year – far fewer than the six they were expecting four months ago. Even wilder, some traders have built up bets that the Fed might raise interest rates again, with options markets now suggesting a roughly one-in-five chance of a hike within the next 12 months – an unthinkable prospect a few months ago.

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📅 On the calendar

👀 What you might’ve missed last week

US

Europe

Asia

🤔 Why it matters

Investors entered the year betting the US dollar would fall, but they’ve been forced into a rethink by a resilient economy and some sticky inflation – both of which are discouraging the Fed from cutting interest rates. That’s had the greenback sitting pretty, gaining 4% against its major developed and emerging-market counterparts, according to a Bloomberg currency index. Traders are now predicting that the rally will continue: they’ve amassed huge dollar-bullish positions in the futures market, with their combined net positions currently the highest since 2019 – a stark contrast to the start of the year.

The US economy grew by less than expected in the first quarter, while an important measure of underlying inflation jumped. Economic output increased at a 1.6% annualized pace last quarter from the one before – the slowest in almost two years and well below the 2.5% forecast. Meanwhile, the core personal consumption expenditures index – the price-pressure gauge that’s closely watched by the Fed – rose at a surprising clip, increasing by 3.7%, from 2% the quarter before. That marked the first acceleration in a year, which will likely compel the Fed to further delay any interest rate cuts.

The eurozone appears to be emerging from its recent stagnation: its composite purchasing managers index (PMI) rose to an 11-month high of 51.4 in April, up from 50.3 a month earlier and considerably stronger than the 50.7 expected by analysts. That was the second month in a row that the closely watched gauge of business activity came in above the 50 mark that separates expansion from contraction. And that encouraging trend will likely reassure the European Central Bank that the bloc is still on track for a “soft landing”, rather than a recession.

With dwindling expectations for any interest rate cuts this year, you might’ve expected gold – which pays zero income – to fall from grace. But it’s gained instead, hitting a new all-time high this month. At the heart of this extraordinary surge is some relentless demand from China, where consumers, investors, and even the central bank have been flocking to the safe haven. Further fueling the rally are huge bets by Chinese speculators, with long gold positions surging to a record 324,857 contracts on the Shanghai Futures Exchange, equivalent to 325 metric tons.

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