【MACRO Alert】The dominance of economic data in driving the market, the shift in Fed policy guidance, and investors' responses!

The recent monetary policy statement from the Federal Reserve emphasized the reduced likelihood of rapid rate cuts in the summer, keeping the currency market relatively stable during the northern hemisphere summer. Despite the soft inflation data announced by the US on June 12, which briefly triggered minor rebounds in major currencies, market volatility subsequently decreased.

The Fed kept its benchmark interest rate unchanged at last week's meeting and expects one rate cut this year, reducing rate cut expectations compared to March. This policy adjustment helps to eliminate uncertainty about the future policy path, thus reducing implied volatility in the currency market. The decrease in global foreign exchange implied volatility, coupled with the clarity of Fed policy, provides a relatively stable market environment for carry traders. They typically borrow currencies in low-interest-rate regions and invest in high-interest-rate regions, especially in emerging markets.

In the current economic environment, the U.S. bond market is sending a clear message to investors: economic data matters far more than Federal Reserve officials' statements.

This phenomenon has been particularly evident in recent market dynamics. Last Wednesday, lower-than-expected Consumer Price Index (CPI) data triggered a significant rally in the U.S. Treasury market, one of the largest increases seen this year. Despite the Fed's dot plot indicating potentially only one rate cut this year, subsequent unexpected declines in Producer Price Index (PPI) data and an increase in initial jobless claims further indicated easing inflation pressures, causing bond yields to decline once again.

Fed Chairman Powell acknowledged during the post-meeting press conference that the Fed is closely monitoring data trends rather than relying solely on policy guidance. This shift in stance suggests that market expectations regarding interest rate prospects may continue to adjust with the release of key economic data, leading to ongoing volatility in the U.S. bond market.

In May, moderate increases in core CPI data and cooling signs in other labor market indicators have bolstered investors' confidence that the Federal Reserve may begin cutting interest rates later this year. Derivatives trading indicates market expectations of two 25-basis-point rate cuts by the Fed in 2024, a more aggressive outlook than the Fed officials' dot plot forecasts. Despite these market expectations, Chairman Powell and other Fed officials have hinted at caution regarding these forecasts. They emphasize that the Fed is not attempting to signal strongly but will need several solid inflation reports to gain confidence before easing policy.

With the Fed refraining from providing explicit guidance, market volatility could increase. Following a sharp decline in inflation at the end of last year, U.S. Treasuries saw a strong rebound, which sharply reversed at the beginning of 2024. Since late April, the yield on the 10-year Treasury has dropped nearly half a percentage point, highlighting market uncertainty. Despite the current strength of the U.S. economy, several institutional analysts suggest the Fed may not begin cutting rates until after the November U.S. elections.

During this period, the yield curve of U.S. Treasuries may remain inverted. Fed officials indicate they will not overreact to one or two data points but will wait for more positive economic signals. This week, the market may catch its breath as it lacks significant economic data comparable to the past two weeks. However, speeches from several officials including Fed governors Quarles and Kudlow could impact the market.

In summary, the dynamics of the U.S. bond market indicate that the influence of economic data is increasing amidst statements from Federal Reserve officials. Investors need to pay closer attention to the release of economic data and be prepared to respond to the continual adjustments and fluctuations in market expectations.