What to expect from the FOMC❓

Over the past weeks, the number one topic has undoubtedly been central banks and inflation. Investors are now wondering if, after a cycle of interest rate hikes around the world, the markets are approaching the so-called Pivot, i.e. a slowdown in the pace of such rapid tightening and a turnaround in the rhetoric of central bankers. Tomorrow it's time for the Fed. CPI inflation in the US has strengthened the chances of a dovish move by the Fed. Let's look at the key points to better prepare for tomorrow's FOMC meeting.

The biggest drop in CPI inflation since April 2020!

CPI inflation came in clearly below expectations. The main surprise is the decline in core inflation. For core inflation, the energy contribution weakens: from 1.3 points to 1.0 points. The commodity contribution also weakens, from 1.1 points to 0.8 points. The data may suggest that the peak in inflation is behind us, which may support the recent change in rhetoric from the Fed. Also noteworthy is the small increase in monthly inflation. Source: Bloomberg

FOMC will raise rates

A hike at tomorrow's meeting is more than certain. The market is currently discounting a 50 basis point hike at tomorrow's FOMC meeting. This path also seems to be confirmed by swaps, which point to an almost 100% chance of a 50 basis point hike. What does this mean? The market is set for decisive Fed action. This scenario also seems to be confirmed by analysts surveyed by the agency. Source: Bloomberg

What will the dot-plot show?

It is worth remembering that in December we will get a new dot-plot (published quarterly), where members will convey their current expectations for the path of interest rates. September's forecast pointed to a median of around 4.6% The forward rate is now projected to jump to 4.8% - 5.0%. If the Fed raises rates tomorrow by the predicted 50 points, and the marginal rate is not raised above 5.0%, we will be close to the expected marginal rate, which could further strengthen market bulls. Source: Bloomberg

What awaits us in 2023?

The composition of the voting committee changes quite a bit next year. This year it was very hawkish, and next year it becomes decidedly more "dovish" taking likely interest rate expectations. Remember, however, that ultimately the decision is made by the chairman, the members can only express a dissenting opinion - but this has not happened recently. Source: Bloomberg

Market behavior after CPI inflation reading

The US500 index broke sharply above the long-term downtrend line after the publication of the CPI reading. The nearest resistance is at the level of 4175 points, where there is a barrier set by the Fibonacci measure and the upper limit of the technical 1:1 structure. Source: xStation 5