Premature optimism

Stock markets are edging lower on Thursday, paring back this week’s gains as the Kremlin denies substantial progress in talks and the Fed begins its aggressive tightening cycle.

As ever, we need to take commentary coming from the Kremlin with a pinch of salt, both good and bad, but the latest comments have come as a blow to the markets. We’ve seen cautious optimism building in the markets this week as the two sides appeared to be making progress, even if it was occurring against the backdrop of more horrific Russian attacks in Ukraine.

But they serve as a reminder that there was an enormous gulf between the two starting points and ultimately, a deal will only be reached if both sides are serious about doing so. Given the difference between the rhetoric and the actions of the Kremlin over the last couple of months, I’m not filled with hope and this presents a major downside risk for the markets.

Fed ramps up interest rate projections

The Fed meeting on Wednesday was a rarity, in that the central bank quickly conformed to the market’s way of thinking after months of pushback. The Fed now sees six more rate hikes this year, on top of the one announced yesterday, representing a 25 basis point increase at every meeting for the rest of 2022.

And with a large minority forecasting even higher rates by year-end, the chance of a 50 basis point hike at a meeting has certainly increased. The rhetoric from Chair Powell and his reference to the labour market being tight to an unhealthy level further supports the view that the rate of increases this year will be substantial. Now it’s just a question of whether the Fed’s actions, combined with moves in commodity markets, will become recessionary, something the markets may be starting to price in.

BoE pares back expectations

The Bank of England took a very different approach today, raising interest rates by 25 basis points, before paring back expectations going forward. It was quite remarkable that one policymaker, Jon Cunliffe, voted against a rate hike considering inflation is at 5.5% and is expected to peak above 8%.

But it was this, combined with a slight softening in the language around future tightening that pushed markets to slightly pare back expectations for rate hikes this year. From being likely to it might be appropriate to tighten further is only a slight tweak but perhaps it comes earlier than expected. Still, markets are pricing in another 100 basis points of hikes this year, something the BoE doesn’t seem to be on board with.

CBRT to pursue disinflation as self-inflicted inflation continues to surge

The CBRT left interest rates unchanged at 14% today, as expected, and claimed it will pursue disinflation decisively. A bit rich considering their past moves have led to inflation at 54% and rising. Sure, the rising energy costs they alluded to will contribute to it rising further this year but it’s in no way been the key driver. Not that this will influence the central bank’s decision-making.

Bitcoin slips near key resistance

Bitcoin is getting hit in risk-averse trade after bouncing back strongly over the last couple of days. It rallied strongly to push back above USD 40,000 but fell short just shy of USD 42,000 and is now being dragged lower alongside other risk assets.

Ultimately, what we’re seeing here is a continuation of the consolidation we’ve been seeing in bitcoin for weeks. That could continue for a while longer yet and a break to the upside probably looks more likely than the alternative but as ever in this situation, it’s tough to say. A move above last week’s highs would be a big step in the right direction.

For a look at all of today’s economic events, check out our economic calendar:

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Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam