US stocks are getting pulled all over the place as investors digest both a wrath of economic data and a chorus of Fed speak that has de-escalated aggressive tightening fears for now. Impressive earnings from UPS and Exxon helped risk appetite early but that faded quickly as traders remain fixated over everything about inflation. For about 10-minutes much of Wall Street took a break to hear the news that Tom Brady announced his retirement.
Equities extended their declines after the ISM manufacturing report and JOLTS data showed inflationary pressures intensified. The ISM, JOLTs, and construction data all support the economy is in a good place, except for the 800-pound inflation gorilla in the room. The ISM prices paid index soared from 68.2 to 76.1 and the JOLTS data showed the labor market remains super tight as job openings rose to 10.93 million, much higher than the consensus estimate of 10.3 million. Pricing pressures are still ascending at a pace that should concern the Fed and wage pressures are only going to get hotter as the number of job openings increases.
Before the US economic data, a lot of traders were thinking it is time to forget about a half-point rate hike in March, unless inflation gets significantly hotter. Wall Street was starting to lean towards a 25-basis point increase in March, but that won’t remain the base case if wage pressures and prices paid continue to soar. For risk appetite to reassert itself, investors need to be convinced that the Fed will not become too aggressive in tightening policy.
The Reserve Bank of Australia (RBA) kept rates steady and decided to discontinue its bond-buying program this month. The Australian dollar initially declined over the dovish surprise as the central bank decided to take a patient stance with inflation, noting they will continue to monitor it and showed no urgency to deliver rate hikes. The bank made it clear that ending QE does not mean rate increases are imminent.
BOE expected to raise rates
The Bank of England is expected to deliver another rate increase, this time lifting rates by 25 basis points to 0.50% and signal that more are coming. The BOE has telegraphed that they will reduce the size of the balance sheet once interest rates are back to the 0.50% level. The ending of bond reinvestments would mean that GBP 25 billion of gilts would not be bought this fiscal year. The bank is getting closer to selling bonds, but that might not happen until the summer.
Bitcoin will continue to trade like a risky asset and most likely benefit if central banks continue to show some hesitancy in turning very aggressive with tightening monetary policy. The BOE and ECB rate decisions might have a larger impact on cryptos than normal as Wall Street is looking for a cue on which direction risk appetite is headed. A lot of January data in the US is expected to be soft and that should continue to support the Fed’s growing chorus of members that want an interest rate increase cycle that does not disrupt the economy.
Bitcoin should continue to stabilize here but if it breaks USD 40,000, that would surprise many traders and could see some bullish momentum.
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