Trump puts pen to paper and the Fed comes in hawkish

Deal signed: Oil expected to begin flowing

Overnight, President Trump signed the interim peace agreement in Paris, aimed at restoring oil flows through the Strait of Hormuz. Iran has also signed, and Pakistani Prime Minister Shehbaz Sharif has announced that the MoU will take effect immediately. The US have also declared that vessels are beginning to move through the Strait, and it is expected to open fully tomorrow. 

Ultimately, though, despite the deal receiving quite a bit of criticism – with some calling it a win for Tehran – this is good news, and hopefully it holds, so we can get back to trading good old-fashioned macro.

However, as you would expect, this is unlikely to be a swift opening of the Strait, as several G7 members have noted recently.  And even if we do see the doors fully open, it could take weeks (probably months) to return to normal flows; therefore, oil prices could remain elevated for some time.

Asia-Pac stocks rallied strongly overnight on news of the deal signing, with US equity index futures currently green across the board. Unsurprisingly, Brent crude has continued to trade lower, dipping a toe below the widely watched 200-day SMA at US$78, with the USD broadly steady this morning after rallying in the wake of yesterday’s Fed meeting.

Fed’s Warsh came in hawkish

It was all about the Fed decision yesterday evening (for me), which left the federal funds target rate (FFR) unchanged at 3.50-3.75% for a fourth straight meeting. This was also Kevin Warsh’s first meeting as the new Chairman, which arguably came across as very hawkish. For now, forward guidance has also been dropped. This will, of course, increase volatility around inflation and employment prints going forward.  

We were presented with a meagre four-paragraph statement, and the easing bias was removed. The ending was also rather blunt, adding: ‘The Committee will deliver price stability’, with no mention of the other side of the Fed’s dual mandate.

The SEP was hawkish, with the FFR revised up to 3.8% from 3.4% in March, suggesting the Fed expects rates to end the year higher than previously thought. The 2027 FFR was also revised up to 3.6% (from 3.1%) and 2028 up to 3.4% (from 3.1%), with the longer run unchanged at 3.1%. 

The widely watched dot plot also showed that an eye-popping nine members pencilled in at least one rate hike this year, which was much more than expected. Warsh did not submit a dot, in keeping with his long-standing scepticism of forward guidance. Markets are now fully pricing in a Fed rate hike for as soon as October. 

Warsh also used his first press conference to unveil several task forces examining the Fed’s communication practices, its hefty balance sheet, the collection of official data, and the framing of the inflation target itself. Commentary doing the rounds today reads this less as housekeeping and more as the groundwork for genuinely structural change.

BoE rate decision: MPC vote split eyed

Closer to home for me, the BoE claims the spotlight at 11 am GMT today. Investors have assigned a 95% probability that the central bank will leave rates on hold. Therefore, the focus will be on the MPC vote split, as this should provide us with a clue on when the next rate hike may come – markets are pricing in nearly 32 bps of tightening by year-end.

The previous MPC meeting in April saw an 8-1 split, with Chief Economist Pill being the lone dissenter opting for an immediate 25bp rate hike. Economists expect a 7-2 vote split today, with presumably Megan Greene joining Pill. Anything higher – like 6-3 – will be considered hawkish and underpin the GBP, while another 8-1 or a unanimous hold may be interpreted as more dovish and weigh on the GBP. 

There will also be no economic projections or press conference at this meeting.