Geopolitics and FOMC desperation to ditch the dot plot
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Welcome to the Saxo Market Call. Before we get started, it's important we emphasize that the views and opinions expressed in this podcast are those of the host and guests and do not constitute investment advice or recommendations. All information provided is for educational and entertainment purposes only. All right, everyone. It is Wednesday, 18th of June, 2025.

Uh, apologies for missing the last couple of days. I was away at a conference, uh, but, uh, plenty to talk about today, uh, with, uh, what's going on in the world. We have the Iran-Israel conflict. I'll talk a little bit about that. I have a lot to say on the FOMC. Uh, I'm not so sure what they delivered tonight, but, uh, I think I'm leaning for a dovish FOMC and a couple other little bits and pieces. Uh, let's start off with, uh, what is shaking the market most. Uh, the, the Friday was, uh,

The Friday risk-off was clearly triggered by Iran-Israel exchanges, and we've seen a follow-up on that and an escalation of that. And we, of course, need to understand where this is headed. We know that the big risk points with the real sort of risk of contagion across global markets would be anything that disrupts that Iranian and other oil supply if the Straits of Hormuz are blocked or if Iranian oil facilities themselves are somehow affected.

on the target of Israel's attacks, which they have not been so far. It feels like this is – it doesn't feel like it. It looks like Israel is targeting, of course, Iran's nuclear program, which it finds existentially threatening. And it seems clear to me that there will be no outcome here or no de-escalation until that nuclear program has been completely eliminated.

And then the tricky bit with that is that the main facilities that are involved, at least as far as I understand, in the uranium enrichment that could be used as components for nuclear bombs is deep within this Natanz Mountain or Natanz Complex. And to take that out thoroughly requires the U.S. bunker buster so-called bombs, only ever been used once, I think, or a couple times in Afghanistan before.

And it's not just the bombs themselves, but their delivery, which requires the very largest U.S. bombers. I believe it's B-2 bombers, and Israel does not have those. So you'd have to see – it's not like the U.S. can just offer to sell Israel a couple of bombs. You'd have to see direct U.S. military involvement, which is what is theoretically in play here. Trump not making any indication yet in either direction, just demanding that Iran –

make concessions basically or come to the table. But I just, I just wonder, you could say that, um, what does, what does it look like from the Israeli point of view to have Iran's nuclear program totally eliminated? Are promises from this regime, would they be considered acceptable? Um,

Clearly, Israel has an incredibly deep intelligence network and knows what's going on. But it feels to me like the only way to put two and two together here and find an acceptable outcome from the Israeli point of view would be with regime change. And that's a tall order. This regime has been – of course, it's unpopular there domestically, but that doesn't really matter in terms of its ability to hold on to power anymore.

And what could this regime do if it feels existentially threatened? I really don't know. So this is – to me, this is going to drag on whether it – of course, whether it disrupts oil supply is the key question for global markets. But if there is the risk to this regime, does that risk rise if they do something desperate?

And in any case, what is the risk to that supply somewhat medium to longer term if we see a regime that is on its knees and getting popular uprisings and being disrupted and you have chaos and disorder? These efforts or regime change by foreign powers have gone badly wrong in many places in the past. Look at what happened to the debacle in Afghanistan, which –

Let's be honest, it was horrible for Afghanistan but didn't have much economic impact elsewhere because Afghanistan does not export anything of note besides, well, opium really. Whereas Iran, of course, is a key player in global energy and brings in China as well because a lot of that Iranian crude that is getting exported does end up in China.

So shortly put, huge risks remain, and the key elements remaining, of course, besides disruption of oil supply, would be the involvement of the U.S. in that conflict. All right, let's move on to other markets. We did see a bit of risk off yesterday. Not much to talk about technically. I've kind of been beating on a dead horse in terms of the technical levels in focus, that 20,000-plus area.

And the NASDAQ 100 would be a key one if we are seeing some consolidation and risk appetite. The consolidation has already been there a little bit more. So in Europe of late, of course, it has also traveled further and faster to the upside than the U.S. But what does the FOMC bring into play? I'm not sure if there's really much risk sentiment reactivity around the FOMC today. So I'll focus a bit more on what I think the FOMC may or may not deliver today.

And I think some important twists on sort of the forward guidance bit of the feds, what the fed has been doing since the global financial crisis, and as well as whole 2026 situation, uh, where we know that, uh, Trump is, uh, the number one job qualification, uh, from Trump's point of view and nominating a new fed share will be their level of dovishness and willingness to cut rates. So, uh,

We have a market that is pricing about 15% odds of a July, late July FOMC rate cut and around 55% of this rate cut not coming until September. In other words, 45% odds that we see no rate cuts until at least the October meeting. And we have priced into the forward curve about 50 basis points of cuts for this calendar year. And if you look at what scenario would be required for

to get to that outcome. It's actually kind of a weird scenario and I think a fairly unlikely scenario. And so what I mean to say by that is that it's not because the market has strong conviction that this is the scenario, that that is what is priced. It could be that the market doesn't know what to price and is pricing a whole array of outcomes.

And to me, it's more likely that either A, we get no rate cuts because the economy continues to muddle through and inflation picks back up, perhaps from crude oil or perhaps the labor market continues to steam along at an acceptable pace or both.

Or we get 100 or even 125 basis points of rate cuts because the labor market is deteriorating and inflation and oil prices be dams because I think the Fed's first of the – it has a dual mandate, but its primary mandate is U.S. labor market. So – and then on all that point, and I've said this before many times on this podcast and in my FX updates before.

I think this era of forward guidance is way past the sell-by date. I mean way past the sell-by date. First of all, there's no visibility on the economy. There's no need for the Fed to do this forward guidance, which was entirely established to reassure the market that the Fed was going to stay extremely easy forever back in the days of the global financial crisis since the fiscal authority was asleep in the wheel and the central bank was the only leg

that could stimulate, really stimulate the economy. So the two aspects of what I just said there, that whole bimodal distribution, the bimodal was the word I stole from the conference I was at. It was from Numura, by the way, so thanks for that word. It's kind of the idea I've discussed before, the idea that we could see either more cuts or... Actually, I haven't discussed the no-cut scenario, but I have discussed that we could be set up for far more cuts than is currently priced. And then

To sort of underline my point that I've been making for a long time about the forward guidance past its sell-by date, we have the Fed whisperer himself, Nick Timmerhaus, of the Wall Street Journal out in an article. By the way, Saxo clients, you get all this great Wall Street Journal stuff for free on the platform if you have your English language settings on the platform. I can't vouch whether that's the case globally, but for most regions, Saxo clients get all this stuff for free. It's a great value.

just as a client on the platform. Tim Rouse in an article hinting basically that the Fed is really not too enthralled with this whole dot plot circus. So while there's a focus in all the press about, oh, where's the dot plot? Are they going to price this? Are they going to price that? I'm not really sure it matters. I think the more important thing

And his article, by the way, goes on to discuss this level of dissatisfaction. And I suspect, very strongly suspect, that within the next six months, certainly next year, we'll see the dropping of a lot of this forward guidance and maybe an entirely removal of the dot plot. I think the Fed would do well to get rid of it entirely. So there could be some focus on that. It could get some reactivity. I think more important will be just the rhetoric around the statement in Powell's press conference on this.

Whether you're getting the sense that their level of concern is rising and therefore opening the door more widely for the next meeting. So it really is about the next meeting and the trajectory because then we get more reactivity around the incoming numbers, things like today's jobless claims.

Even today's housing market data, so the housing starts and building permits data that is up today, really a lot of rising concern on the status of the U.S. housing market that I don't think is getting enough coverage. By the way, if you want to follow that, a great follow for all things U.S. housing.

Just some good stuff, good work out there. Wolfstreet.com, just as it sounds, one word, Wolfstreet, as in the wolf of Wall Street. Wolfstreet.com, he covers especially housing very well and just shows you the scale of the housing bubble that inflated during the pandemic. Let's recall we're at these very high mortgage rates relative to the pandemic era rates. If you start to see a weakening jobs market in the U.S.,

people losing their jobs and some more forced selling into what is already a rising amount of inventory, it could be in for a really bad self-reinforcing downward spiral as these housing prices are not affordable for people until mortgage rates – unless A, mortgage rates fall several hundred basis points or housing prices correct tremendously. And if the latter is the outcome –

That impacts consumer sentiment, willingness to spend, feeling of how wealthy you are, all of these things. So shortly put, housing market is a big risk to the US economy if it is softening. It sort of is an add-on risk or an aggravator of the downside risk if we are seeing –

this economic weakening. The NAHB survey of new home builders that was out yesterday, it's one of the better leading indicators on the US housing market. It was quite weak to say the least, dropping a few points to 32, which is the third weakest reading since 2012 when the market was still recovering from the depths of the global financial crisis in the first housing bubble. So this is getting towards the levels of the worst single month during the pandemic, etc. So

And then the highest or the worst single month in late 2022 when rates were accelerating to such a degree and mortgage rates causing concern for the housing market.

All right. In other news, we had the May UK inflation numbers coming in this morning. Not a whole lot to take away there. The core services was maybe the slightly downside surprise of note, 4.7% year-on-year versus 4.8% expected and 5.4% in April. That's been the most elevated inflation number. But the core was at 3.5%. That was as expected, and that was a drop from 3.8%. I'm not so sure the Bank of England has expected

much to surprise with tomorrow. It needs that inflation to come in a bit lower still. Sterling quite weak yesterday. I'm not sure what the specific source of this was. I think in general, yes, Sterling should be sensitive to weak risk sentiment. And if we were to come in for a proper, let's say a 5% correction, equities or something, I would suspect that Sterling would get...

would be heavily negatively impacted by that as with the UK's external deficits and its reliance on the rest of the world for funding of its fiscal deficits, et cetera. It's just not positioned well at all, that currency. So that was interesting. If anything, they can either do nothing and that's priced in or they can surprise marginally dovish by perhaps warming up for

uh, or, or waxing sufficiently dovish to suggest that an August move, uh, could be in play from the bank of England. Uh, more interesting. We have a, this whole flurry of central banks this week. We've got the S and B, uh, it was out, uh, just before I came in here, I didn't even see what they did, but, um,

The S&P tomorrow is quite interesting. So the Swiss National Bank, especially combining that a little bit with where Euro-Swiss is, that's the most heavily traded Swiss franc pair, where Euro-Swiss is trading around this 94 level going into that.

So we have the S&B priced to go negative, so basically priced to cut 50 basis points this year and ending up at a negative 25 basis points policy rate. But the interesting thing would be if they just slash it all in one go tomorrow, which is about 50-50 priced – recently it was 50-50 priced at least –

If they could do it all in one go and indicate maybe even a willingness to go further if necessary, just to sort of clear message on the currency. So combining that, if we get a reheating of the fiscal story from Europe later this month with Germany announcing its budget, et cetera, it could be interesting to see if Euro-Swiss can finally show some life and rally clear of that 94 a bit more convincingly and get back up into a higher range, maybe even pushing towards parity in the coming months.

That and the gold price staying a little bit under – sort of not under pressure but not – the gold focus has faded a little bit here recently and other metals are taking over. We've talked about platinum and we'll have Ola back soon, of course, to talk about that and silver, which has achieved another leg higher. Big breakout there. It's a new high since –

I guess it was 2012 was the last time it traded at these levels in that previous big bull market back then. So interesting moves there. And of course, crude oil quite elevated. Again, it could go another $10 higher on signs of any kind of disruption of actual supplies. And it could go a heck of a lot lower suddenly if we get some kind of clearing of the skies. On the latter, I just don't think we'll see that because –

And I'm not talking about crude oil downside, but proper clearing the skies because it does feel to me like this has to follow towards some kind of conclusion, that there's not a conclusion by meaning ongoing disruption of Iran, which is a longer timeline than just, oh, we'll sit down for talks. It doesn't feel to me like talks or something or signing a deal or promises from this regime will be acceptable to Israel. So it does feel like major escalation is de-escalation is not something –

We should expect this needs to come towards some kind of, yeah, a conclusion, whatever that looks like. But of course we'll update that, uh, in coming, uh, in coming podcasts as, as the situation develops. One last thing I need to flag this, uh, and I should have flagged it at the top of the show, uh,

And I'll provide the link in the podcast description. I am hosting an FX webinar tomorrow, so a webinar discussing mastering FX. What a grandiose title. But in any case, if you're not mastering FX, at least discussing FX, what's going on in the market, the big themes here, a lot of which we've touched on here in the podcast.

And then a bit more specifically, some drill downs into some directional calls, some thoughts on technicals and how I view technicals and charts and some of the current setups in the market. So if you like to follow FX and want to learn more or just hear me chit chat about FX and like me to ask or like to ask me a question, et cetera, live on the webinar, you

please do sign up for that. It is, again, it's happening tomorrow. And if you miss it, it's okay. You can, we'll provide an article with a link to the recording of the webinar. But again, look for the link in the podcast description.

Also recall that tomorrow is a holiday for U.S. markets. Maybe a little bit interesting at the margin that you have post-FOMC situation or environment to get trading done for a holiday that's in the middle of the week. Very unusual for the U.S. with what's going on in Israel, Iran, et cetera. So maybe just a bit more volatility afoot due to this odd holiday schedule. All right. That was it for today. We'll be back soon with the next Saxo Market Call.