Inflation feeling hot hot hot, Fed rate path confirmed, BOC surprise, bitcoin hovers above USD 19k

Ole-ole – ole ole. Ole ole -ole ole.

Me gas prices on fire – Me food bill on fire – Inflation feeling hot hot hot!

Fed hawks – All around me feeling hot hot hot!

When you hear the Merrymen’s hit song ‘Feeling Hot Hot Hot’, you normally think of partying somewhere tropical, but today it does the job in summing up today’s inflation report. Inflation remains scorching hot. US inflation accelerated more than what economists were thinking, rising 9.1% from a year which is a 40-year high. ​ On a monthly basis, headline inflation rose 1.3%, which was the largest increase since 2005.

The US consumer is clearly weakening as real hourly earnings are sharply declining. Food prices are rising but albeit at a slower pace than the prior month. ​ Rents surged as expected, which should keep the pressure on the Fed to tighten aggressively as their rate hikes will have the most impact on housing inflation. ​ ​ ​

It is hard to be a buyer of stocks as the risks of the Fed sending this economy continue to grow. Wall Street isn’t expecting a severe recession, so downward pressure on stocks might be limited to another 5-10%. ​ Rate hike expectations are now locked in at 75 basis points for later this month, but a strong case could be made for a full-point increase.

BOC delivers 100bp salvo

The Bank of Canada is showing financial markets they are not messing around with inflation. The BOC raised rates by a full percentage point and overnight swaps suggest the benchmark rate will rise to 3.75% by the end of the year. ​ Aggressive tightening will have the BOC leading the interest rate differential against a wrath of currencies, which should provide some underlying support for the loonie. ​ Despite the recent weakness with crude, the Canadian dollar looks like it could be positioned for a decent rally over the next few weeks. ​ ​ ​ ​

Bitcoin is holding above the USD 19000 level as traders digest a very hot inflation report and shifting Fed rate hike and cut expectations. ​ The Fed might need to consider a full point rate hike at the end of the month and they could be eyeing rate cuts at some point next year. ​ Bitcoin remains a risky asset that could benefit from a Wall Street that is confident they have fully priced in Fed tightening. ​ The Fed may become a little more aggressive with rate hikes over the July and September meeting, but they could be shifting to a slower pace in November.

Bitcoin is showing some signs of stabilizing, but sellers are eagerly watching to see if the June lows will hold. ​ ​

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