US500 loses 1% ahead of minutes

The situation on Wall Street ahead of today's publication of the minutes from the June FOMC meeting is extremely tense. US500 is losing about 1%, and investors are spooked by returning inflation demons, mainly through the strong rebound in oil prices after the escalation of the situation in the Middle East. Additionally, a recent study by the NY Fed shows that nearly half of the companies affected by tariffs are still planning further price increases.

Will today's minutes deepen this sell-off? Everything will depend on whether a larger number of Fed members see rising inflation risks and actually see chances for a return to interest rate hikes.

Split in the Dot-Plot: Hawkish Tie

The June meeting brought a unanimous decision to keep interest rates at 3.75%, but the dot-plot revealed a deep division within the Fed:

• 9 of 18 members opted for at least one rate hike this year if inflation remains above 2%.
• 8 members opted to keep rates unchanged, and only 1 counted on a cut.
• Kevin Warsh himself did not submit his forecast, which only boosts the aura of mystery around his real position.

The minutes will show how strong the determination of the camp demanding further tightening was and whether the fight against inflation (after five years above the target) completely overshadowed concerns about the labor market.

The chart shows the distribution of expected interest rates by FOMC members

Half of the FOMC members see a hike this year, and half do not. Everything will depend on the behavior of inflation and the economy. Source: Bloomberg Finance LP

The Warsh Effect: Fewer Words, More Volatility

The new Fed chief immediately proceeded to a radical reform of the central bank's communication. He shortened the June statement from over 300 to just about 130 words, completely abandoning traditional forward guidance. This may mean that central banks will be less dependent on incoming data, and even more so on forecasts, and their decisions on changes in monetary policy parameters will be more frequent and harder to predict.

James Bullard warned, however, that this new style resembling the reign of Alan Greenspan could push markets toward higher volatility. There is a significant risk that today's minutes will be shorter and much less detailed than usual. For a panicked market, the lack of clear signposts is an ideal pretext for a further escape from risk.

Will the Minutes Deepen the Stock Market Declines?

The key to assessing the situation is the time discrepancy. Today's minutes reflect the committee's state of mind from mid-June, when concerns about stubborn inflation (fueled among others by tensions in Iran and energy prices) were at their peak.

What happened later?

• Sintra brought relief: Last week at the ECB symposium in Sintra, Kevin Warsh softened his tone, claiming that inflation risks have recently fallen. John Williams from the NY Fed spoke in a similar tone.
• Market positioning: Option traders even began to bet that the market is playing too hawkishly, and the pricing of interest rate hikes was exaggerated.
• Return of escalation in the Middle East: Donald Trump claims that the ceasefire is not in effect and announces further attacks on Iran, which causes oil prices to rise to almost 80 USD per barrel.

Wall Street is already bleeding heavily due to fresh inflation concerns, and the hawkish tone of the notes from mid-June hits very fertile ground and may deepen the declines. The market will get black-on-white proof that the Fed was close to a hike, and if oil prices return to growth, the pricing of a hike for September may again become real, even though it would mean a move unwanted by Trump before the mid-term elections. The hope for stock market bulls is a scenario in which the minutes show the committee as more balanced and inclined to compromise, which could bring relief to the rates market and give air to stocks. Certainly, the lack of an attack on Iran tonight or during the night could also improve sentiment.

However, US500 is losing over 1% and is recording its lowest levels since June 29, breaking the 7500 level and the 38.2 retracement of the last upward wave. If the minutes show the strength of the hawks, a return to 7400 points will be possible. If, however, the minutes turn out to be balanced and the US does not strike Iran, the price may return above 7500 and give a clear signal of the continuation of the upward trend.