The 75 basis point (bp) move in June was aimed at reinforcing the Fed’s message that it is indeed nimble and trying to get ahead of the curve on inflation. The Fed essentially indicated it will have a “single mandate” for the foreseeable future, with the focus squarely on headline inflation. The updated dot plot now shows the 2022 year-end policy rate at 3.375%—a cumulative increase of 175 bps over the remainder of the year. While Fed Chair Jerome Powell noted that a hike of 50 or 75 bps is most likely at the next meeting, I think the Fed will continue to frontload with a 75 bp hike in July (and 50–25–25 thereafter). Moreover, if June inflation and July inflation expectations surprise to the upside and markets smoothly price in another 75 bp hike, the Fed will once again lean into market pricing since there will hardly be any element of surprise to a hike of that magnitude. If anything, a 50 bp hike, when markets have priced in more, could make the Fed look tame on inflation. Lastly, the sooner the Fed gets to neutral, the greater the optionality it has on the speed of tightening going forward.
So how is this going play out next few weeks?
I believe, next week markets will start with a 5-7% upswing followed by a 2.5-4% dip before fed hike. Post hike (July17), there will be bear market bull run for 2-3weeks followed by a reversal. $SPDR S&P 500 ETF Trust(SPY)$
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