US stocks are slightly higher ahead of Fed Chair Powell’s Congressional testimony. Everyone is expecting Fed Chair Powell to deliver his best hits of ‘we have more work to do’ and ‘higher for longer’. Powell might not commit how much higher rates will go, but he will keep the door open for the Fed’s dot plots to move higher. Lawmakers will argue that we don’t need to see a recession to bring inflation back to target. Powell will likely signal that Americans could see economic pain later this year. Powell will most likely stay hawkish given how high inflation remains and the strength of the labor market.
This week, Wall Street is expecting to get President Biden’s budget proposal for fiscal 2024. This morning, President Biden’s op-ed in the NY Times gave a sample of what he will be proposing. He noted that, “my budget proposes to increase the Medicare tax rate on earned and unearned income above $400,000 to 5% from 3.8%.” He is aiming to keep the Medicare trust fund solvent beyond 2050.
This is just the beginning of budget negotiations as House Republicans will not get on board with this first pitch.
The RBA did not surprise after raising its cash rate target by 25bps to 3.60%. The RBA is nearing the end of its tightening cycle as they removed the language about hikes in the coming months. Australia doesn’t have the same wage pressures that the US has and that is why they believe inflation has peaked and that further hikes will be data dependent. The RBA’s dovish hike sent the Australian dollar lower by 0.9% against the US dollar.
After a day to digest ECB’s Holzmann case for four half-point rises, ECB hike odds continue to rise. It looks like no one wants to listen to doves, especially considering we keep seeing core CPI make fresh record highs. Holzmann argued for 50bps point rises in March, May, June and July, with restrictive policy starting at 4.00%.
Nomura bumped up their ECB forecast from 3.50% to 4.25%. Earlier in the week, Morgan Stanley increased their ECB forecast to 4.00%.
Dovish ECB member Lane argued against having policy on ‘autopilot’, emphasizing that it should not be on autopilot, but stay data dependent.
The euro could see some support once we get beyond Fed Chair Powell’s testimony and Friday’s nonfarm payroll report.
Crude prices are wavering ahead of Fed Chair Powell’s testimony to the US Senate. Oil has had a nice start to the month, but lingering demand concerns and further oil inventory increases should cap this rebound. Oil looks like it might need to trade in a range a little longer until we have a clearer outlook for the US economy. The debate over what type of recession will hit the US economy will not be answered in a couple of months time, so we might see conservative calls for demand to remain healthy over the short-term.
In the event, risk appetite runs wild following Fed Chair Powell’s Senate appearance, WTI crude should find major resistance at the $84.80 region.
Ahead of Fed Chair Powell’s testimony to the Senate, gold is consolidating as investors await any signs over how much more restrictive Fed policy will become. A strong bullish argument for holding bullion could be made as global central banks are growing confident peak tightening will soon be in place. The RBA rate decision provided optimism that inflation may have peaked and that further tightening might not be needed if disinflation trends remain firmly in place. Gold might benefit if the rest of the major central banks start delivering dovish hikes.
Also providing a boost for gold is the steady demand it is seeing from China. This current macro environment should lead to stronger central bank buying. The focus for many is the steady buying by the PBOC and if the weaker dollar trade unfolds later this year, gold could shine.
Bitcoin remains anchored despite a potential weekly death cross pattern. Bitcoin had a great start to the year, but since the middle of February prices have gradually softened. Contagion risks from Silvergate Capital and hard landing fears are keeping cryptos heavy, but the key trading range of $21,000 to $25,500 continues to hold up. Crypto traders are closely watching the bond market and if yields refuse to breakout higher, Bitcoin may remain in this trading range.
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