(BCB Group Team)
– US CPI roars.
– All risk assets collapse.
– USD regains is wings.
A couple of days rest for yours truly and it seems the markets wanted to give me some excitement to return to. Yesterday clearly the market had been hoping for some signs of inflation cooling and positioned itself accordingly. The problem with a plan like that is the exit window is very small and when everyone rushes for it at the same time the scenes are ugly. The knee jerk move higher in the USD was brutal with the first price being over a percent away once the numbers were released. Stocks raised the bar with even bigger gaps and the move never lost momentum for the rest of the day. EUR/USD testing 1.0200 seems a long time ago as it opens at 0.9950 and Usd/yen is only off its highs due to the BOJ picking up the phone overnight and checking rates according to sources. Whilst some will fear this means intervention is close, I suspect we have a way to go yet before they finally dust off the trade sheets and actually start selling. Intervention is only ever successful when monetary policy is aligned, and quite frankly it is not yet so expect volatility rather than a turn around here.
The move in stocks was brutal and demonstrated the fact that “fast money” is the only money playing at the moment. Investors continue to sit on cash and understandably so when you look at the economic picture in the short term. That said I can’t help but think the move is an overreaction. The FOMC will do 75BPS next week, and they always were. Calls for a 100 point hike seem outlandish to me mid cycle, so I find myself tempted to buy the dip but with caution.
Crypto was not immune and BTC gave back its recent gains along with ETH and we find ourselves in all too familiar territory at 20,000 and 1600. All eyes are on the merge countdown clock and in a scenario like this I am loath to make short term predictions so I won’t! The levels are clearly defined and I still believe the market is underweight BTC but that is as far as I am willing to go for now.
Levels to watch
US inflation surprise brings markets back down to earth
(Han Tan – ForexTime (FXTM))
Global markets are trying to pick up the pieces after a torrid Tuesday, following the nasty surprise in the latest US inflation report. The higher-than-expected CPI print nullified premature hopes for a “dovish pivot” by the Fed in the second quarter of next year, wrong-footing risk assets while reasserting king dollar’s dominance.
The S&P 500 erased all of its month-to-date gains in one fell swoop, posting its largest single-day drop since June 2020, though US futures are edging higher on Wednesday. At the time of writing, gold remains rooted near the $1700 floor, oil prices are extending Tuesday’s declines, while EURUSD is still cowering below parity.
Markets have been jolted by the realisation that inflation could stay persistently elevated for an extended period, forcing the Fed to persist with more supersized rate hikes. Fed Funds futures duly raised the forecasted peak in this ongoing rate-hike cycle by 30 basis points to 4.3% by March 2023. There’s even now a 35% chance being allocated for a gargantuan 100-basis point hike by the Fed next week.
As long as the FOMC has more runaway before reaching “peak hawkishness”, risk assets are unlikely to garner significant gains in the interim, while sanctioning king dollar’s iron grip across the FX universe.