U.S. CPI and Fed Meeting: Things to Watch Out as BTC Nurses Losses

BY Coindesk | ECONOMIC | 06/12/24 05:50 AM EDT By Omkar Godbole
  • Dollar index, bitcoin at the mercy of core inflation, housing rent and Fed's take on inflation trajectory.
  • Investment banks expects a decline in the housing rent.
  • A hotter-than-expected CPI could shock risk assets.

Wednesday could prove to be a make-or-break day for markets, as the pivotal U.S. consumer price index report will be released just hours before the Federal Reserve's meeting.

The Labor Department's CPI, due at 12:30 UTC, is expected to show the cost of living increased by 0.1% in May, following April's 0.3% increase, according to FactSet. That would keep the annual inflation rate steady at 3.4%. Meanwhile, the core figure, excluding the volatile food and energy metrics, is forecast to rise 0.3% for May, matching April's pace.

Later, at 18:00 UTC, the Fed is expected to keep the benchmark borrowing cost unchanged between 5.25% and 5.5% and publish the interest rate dot plot chart. The inflation data is expected to influence the dot plot projections and Powell's post-meeting communique.

Here are key things to watch out for that could influence the dollar index and bitcoin.

Core inflation, rent price growth

Per investment banks, the risk for the core CPI is to the downside.

"Core (excluding food and energy) price growth is also expected to edge down to 3.5% (from 3.6% in April) on a more normal-looking 0.2% month-over-month increase. Home rent price growth should also slow alongside a lower month-over-month increase in the core services ex-rent measure that Fed policymakers have been watching closely," RBC's economists wrote in a preview.

Per ING, some economists foresee that Owners' Equivalent Rent - the intangible component with a 40% weight in the core CPI basket - will finally come lower.

Potential easing in shelter price pressures, one of the sources of stickiness in inflation in recent months, might rev up Fed rate cut hopes, sending the dollar lower. A weaker dollar often accompanies a rally in risk assets, including bitcoin.

The dollar will likely surge if the month-on-month core CPI tops 0.4%, according to JPMorgan (JPM).

Bitcoin has come under pressure since Friday, losing over 5% to trade near $67,350, according to CoinDesk data. The dollar index, which gauges the greenback's value against major currencies, has risen by 1% to 105.20.

Fed statement

A status quo rate decision is likely a foregone conclusion, and so is the interest protection chart, which is expected to show two rate cuts this year instead of three. Since Friday's hotter-than-expected payrolls data, markets have priced out odds of more than two rate cuts this year.

As such, the focus will be on the central bank's take on the inflation trajectory.

"Should the Fed remove the sentence 'in recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective' from its statement, short-dated U.S. [Treasury] yields and the dollar could drop," ING said in a note sent to clients early Wednesday.

"Chair Powell typically delivers a dovish press conference and the dollar has ended lower on the day over the last four consecutive FOMC meetings," ING said. "we would have to see some shock 0.4% MoM core CPI number or a more hawkish Powell to get DXY anywhere near the 105.90/106.00 area. We see that as unlikely."

This year, bitcoin has consistently seen price pullbacks in the lead-up to the Fed decision, only to resume the uptrend after the event.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.