Banking contagion risks are evaporating and Wall Street is ready to pile back into risky assets. US stocks are surging as regional bank stocks bounce back and after the eight straight deceleration with the annual inflation pace supports the case for some that the Fed’s tightening work is almost done.
Today’s inflation data still supports the case for another quarter-point rate hike by the Fed. Wall Street seems to be focusing on both the strong rise with shelter prices as that made up 70% of inflation, but is widely expected to decline going forward. Service prices are still going up and wage pressures could still be lurking around. The supercore reading rose from a month ago and with strong core service readings, it is hard to be optimistic that the Fed will be able to pause.
The headline monthly reading rose 0.4% in February and 6.0% from a year ago, which was the smallest annual gain since September 2021. The core reading rose 0.5%, a tick higher than the consensus estimate, while on a 12-month basis it ticked lower to 5.5%. Inflation is cooling but disinflation trends are clearly not back.
FOMC expectations post SVB and CPI
Obviously given the market turbulence over the past week, it is no surprise that expectations for the FOMC meeting on March 22nd are all over the place, but Nomura’s call might be a bit of an overreaction to the news that came out over the weekend. Nomura is making a call that the Fed might not only debut a new lending facility (which would not surprise anyone), but also cut rates by a quarter point and stop quantitative tightening. This call was made before today’s inflation data that showed rising price pressures remain.
Many banks have abandoned their rate hike calls and are expecting the Fed to pause. Goldman Sachs, Barclays, Wells Fargo, and NatWest are in the pause camp, but probably would not hesitate to change that call if disinflation trends struggle over the next couple months.
Bank stocks are rebounding as financial stability risks somewhat ease and now it seems the focus on Wall Street can switch back to inflation. Heading into this FOMC decision, inflation should still be the most important driver and that should support further hawkishness. The Fed might only raise rates by a quarter-point, but they should signal their inflation fight is not over.
Crude prices are falling after a mostly in-line inflation report sealed the deal for at least one more Fed rate hike. The Fed’s tightening work is not done just yet and the chances are growing that they will send the economy into a mild recession, and as risks remain that it could be a severe one. Brent crude is below the $80 level and that seems to suggest growing pessimism with the short-term crude demand outlook. If technical selling is triggered on the break of the $78 level, oil could make a run for the September low around the $76 region.
Gold prices are lower as Treasury yields rebound after a mostly inline inflation report squashed the idea that the Fed could pause on rates. The movement in Treasuries is extreme and as yields surge here, especially on the short end of the curve, gold will give back some of yesterday’s rally. As long as PPI doesn’t come in scorching hot, gold should find a range here around the $1900 level.
Bitcoin is surging on both optimism market turbulence over the US financial system is over and as the case for investing in DeFi projects just became much more attractive given the regulatory hurdles that will pummel traditional banks. Bitcoin is near the $26,000 level despite losing a couple important crypto banks and as stablecoin USD nearly recovers its $1 peg.
The king dollar trade appears like it isn’t coming back and that should be good news for cryptos. Bitcoin might be able to make a run to the $30,000 level if Wall Street is right that the Fed’s work is almost done.
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