The Federal Reserve to Fire the Second Shot

Source: Wall Street Intelligence Circle

If next week's market is likened to a movie, then the real protagonist is not an economic data release, but the Federal Reserve meeting minutes.

These minutes will reveal what the Federal Reserve was thinking during its May meeting (the first meeting chaired by Waller), and this will be the "second shot" for the market.

First, the meeting minutes are likely to be hawkish and unfriendly to the market—because the meeting took place before the weak non-farm payroll (NFP) data. At that time, the market witnessed that inflation risks hadn't been entirely eliminated, oil price shocks had just passed, and the dot plot still showed an inclination toward rate hikes. However, how the market moves depends on how the minutes are interpreted—whether with a mindset from before or after the NFP.

Second, what’s truly impactful is one specific scenario: if the minutes reveal that it wasn’t just a “minority of committee members” with hawkish views, but the “majority” seriously discussing an imminent rate hike. Then the US dollar and 2-year Treasury yields would rebound, and gold would likely pull back.

Third, the market will pay more attention to whether there is “internal division.” Waller mentioned there could be a “family fight” in July, so the most important aspect of the minutes is not whether the language is hawkish or dovish but whether the committee is already split into two camps:

One camp is concerned that inflation isn’t over;

The other camp is worried that employment is starting to cool down.

If the minutes show significant disagreement, the market will believe that future policy decisions will lean more heavily on data, and rate volatility will continue to rise. This outcome may not necessarily boost the US dollar, but it will increase asset volatility.

Fourth, in addition to the Fed minutes, there are two other supporting actors—ISM Services data and US Treasury auctions.

If ISM Services is strong, it will restore market confidence in the resilience of the US economy, and the probability of rate hikes may climb again.

If ISM Services is weak, it will reinforce the view that “the cooling in employment is not accidental,” thus keeping the US dollar under pressure and benefiting gold.

The Treasury auction determines whether long-term yields can stay stable. The 10-year yield now remains around 4.47%, without a sharp drop, indicating that fiscal supply and the term premium are still weighing on the bond market. If the auction goes poorly, both gold and tech stocks would struggle, as real rates might rebound.

Next week's meeting minutes are more like a “hawkish echo,” and may not be enough to change the market direction. What truly can change the market direction is whether it is strong enough to offset the shock from the latest non-farm payroll data.