You had the feeling that Wall Street, with perpetually itchy buy-button trigger fingers, was primed for this FOMC. As expected, the FOMC raised the Fed Funds target by 0.75%, to a target range of 2.25%-2.50%. It was what Mr Powell said afterwards that turbocharged the FOMO gnomes of Wall Steet. Mr Powell said that it may be appropriate to slow the pace of increases going forward and that the decision on that would become a meeting to meeting one, effectively throwing out the forward guidance.
I should also mention that Mr Powell couched that by saying that he “wouldn’t hesitate” to implement sharper increases if the data warranted it. For some time, the US bond markets have been pricing a US recession, inflation peaking and falling by early 2023, and Fed rate cuts to start in H2 2023. Therefore, markets happily ignored the “wouldn’t hesitate” remarks and concentrated solely on the potentially slower pace of rate hikes bit, ignoring the fact that the Fed still seems intent on getting to a 3.50% terminal rate; it’s just whether it happens sooner or later.
Wall Street surges after Fed rate hike
The result was predictable, of course. The street piled into the buy everything, sell US dollars trade. Wall Street soared, led by the rate-sensitive Nasdaq, which booked over four per cent gains. In my mind, the big winner was Meta, as the buy everything trade limited the fallout of their poor earnings results and forward guidance. Cryptos rallied, bitcoin rising over 8.0%, meaning that in addition to being a haven asset, an inflation hedging asset, a dollar debasement hedge, and a deflation hedge, it is now a peak Fed/Fed Funds hedge. I’m impressed. Even gold rallied overnight, but US bond markets were surprisingly steady, suggesting that for once, a plan had come together perfectly.
Asian currencies didn’t really catch a tailwind either, although they may play some catchup today. Early price action on Asia-Pacific equities shows only modest gains and certainly not FOMO gnome exuberance. It could be that Asia is also watching rising oil prices, China’s covid zero and property market travails, Europe’s imminent gas-induced recession, and the ongoing Ukraine-Russia conflict giving them a more nuanced and less narrow world view, which doesn’t end at the East and West coasts of the United States.
The big winner in Asia looks like it’s going to be the Japanese yen. US bond markets look extremely comfortable with their peak-yield stance right now, and I would have to say that the highs we saw in June could well be the highs in US yields for this cycle. USD/JPY has fallen by 1.0% in Asia today, and long USD/JPY remains a crowded trade executed at unattractive levels. I can well imagine USD/JPY trading at 132.00 now before it sees 138.00 again. It is ironic that it seems just a couple of weeks ago, there was so much noise about getting back in the “widow maker” trade, selling Japanese 10-year JGBs to break the Bank of Japan and stop USD/JPY from rising above 150.00. I think they must have been former USD 200 oil forecasters or “institution” crypto spokespeople in a different life. Thankfully dear readers, the voice of reason is still here for you.
We don’t have another FOMC meeting until the 21st of September now, and a lot of water could flow under the inflationary bridge before then. The FOMC’s priority is inflation, and the data flow they are now relying on could well be either good news or bad news on that front. With forward guidance sub-contracted out to data flow from now on by the Fed, we can assume that volatility gyrations will remain elevated, becoming “operations normal.” Thus, assuming the “buy-everything” trade will now be a one-way ticket to investor nirvana is perilous. That reality will seep into markets eventually, but perhaps not this week.
US GDP could well print a second negative quarter this evening, but forecasts vary widely. Perversely, a negative print will probably see another stock market rally and US dollar sell-off in the context of the price action overnight. The PCE Index data tomorrow, if it shows signs of waning, could see a rinse repeat. It is a strange world where an impending US recession is a signal to pile aggressively into stocks, let alone richly valued technology stocks; I guess you could justify it by saying that financial markets are “forward-looking.”
Today’s calendar in Asia is light once again. Australian Retail Sales missed forecasts, rising just 0.20% in June. That’s perhaps the first recent data I can recall from Australia that wasn’t showing the Lucky Country being as lucky as ever. Tighter monetary conditions may finally be forcing the Battlers to shop less, but given the above forecast inflation print yesterday, it won’t dissuade the Reserve Bank Of Australia from hiking by 0.50% at its next meeting.
Presidents Xi and Biden are due to have a phone call today. US tariff reduction seems to have fallen off the news headlines, and there may be no moves there. China may well be more concerned about the US reiterating the one-China policy and Taiwan. I expect not much to emerge from the phone call and even less to impact markets.
Ahead of the US GDP data tonight, we receive German Inflation for July, which is expected to ease slightly to 7.20% from 7.40%. A higher print will jangle the nerves of investors and give the ECB more unenviable food for thought. Overall, Germany and Europe’s fate is much more closely tied to the Russian natural gas situation and, to a lesser extent, Italian politics. EUR/USD did manage to book an 80 pip gain to 1.0200 overnight but looks in danger of stalling once again. The peak-Fed, buy everything trade, is still in danger of passing Europe by.
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