US Open: The Fed’s Inflation Problem, Rate hikes now priced in for next 3 meetings, Hawkish Fed speak, Oil and Gold crushed as dollar soars on rising rate hike bets, Crypto weakens

US stocks are selling off after the Fed’s preferred inflation reading comes in scorching hot, prompting bets that they will hike rates over the next three meetings. Some traders are also worried that they may need to take rates well above 6.00%.

This morning is not just about PCE inflation, but also the consumer. The consumer is still looking strong as personal income/spending posted healthy gains and as sentiment hit highest level in over a year, which is also bolstering case for a half-point rate increase at the March FOMC meeting.  The Fed’s rate hiking campaign looks like it might go into the summer, especially if the labor market refuses to break. 

FX

The king-dollar trade looks like it is wanting to make a comeback. The bond market selloff is going to take Treasury yields to new highs and that won’t ease up until we see clear signs disinflation trends are returning. The two-year Treasury yield surged over 10 basis points to 4.805%, the highest levels since 2007.  The dollar could outperform here, especially against the yen after Ueda did not abandon the BOJ’s current stance. 

US data

The Fed’s preferred inflation gauge and impressive consumer data is triggering another reset on Fed rate hike expectations.  Headline PCE inflation rose 0.6% in January from an upwardly revised 0.2% prior reading.  Core PCE inflation came in hotter-than-expected at 0.6% month on month.  January personal spending data also rebounded strongly from a revised -0.1% to +1.8%.  Personal income also increased by 0.6%, lower than the 1.0% consensus estimate. 

The final University of Michigan report for February showed sentiment improved from 66.4 to 67.0, a one-year high.  Inflation expectations over the next year ticked lower to 4.1%. 

This morning’s data suggest the economy is very resilient and might prompt more bets that the Fed will need to take rates closer to 6.00%.  Everything will hinge on the NFP report in a couple weeks time, which should provide some evidence the labor market is beginning to cool.  The market should stick to pricing in three more rate hikes, anymore is premature and probably unnecessary for now. 

Fed speak

After today’s PCE data, it is no surprise to hear more hawkish Fed speak. Fed’s Mester noted that PCE shows Fed needs to do a little more.  Fed’s Jefferson noted that “the ongoing imbalance between the supply and demand for labor, combined with the large share of labor costs in the services sector, suggests that high inflation may come down only slowly.”

Oil

Crude prices are falling after a stronger dollar emerged from both a hot inflation report and as a strengthening consumer suggests the Fed might need to do more tightening to get inflation under control.  The risks that the Fed will have to send the economy into a recession are growing. It is getting ugly on Wall Street as risk aversion runs wild and that could keep oil prices heavy.  

Gold

Hot PCE inflation and improving consumer sentiment just broke gold’s back. Gold is in the danger zone as Fed rate hike bets are getting ramped up and as rate cut calls get pushed deeper into next year. Treasury yields are rising and that should keep the dollar strongly supported here.  The 2-year Treasury yield hit the highest levels since 2007 and the 10-year yield looks like it is ready to make a strong run at the 4.00% level. 

Gold still has a bullish playbook for later this year, but the bearish momentum could be strong here if we see a break of the $1800 level. 

Crypto

Risk aversion is running wild on Wall Street and that is dragging Bitcoin lower today.  The bond market selloff is getting ugly and that could support downward pressure for Bitcoin to the lower boundaries of its $21,500 to $25,000 trading range. 

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