The FOMC was read as hawkish, but expectations were high for the situation. Perhaps taking the event out without a major shock is enough to keep risk supportive and potentially at a disadvantage.
Risk assets might interpret this as “too aggressive.” I think it’s premature to panic on this front. The initial tightening of 25 basis points was modest, and the Fed maintained its flexibility. The last thing the Fed wants to do is play cautiously, which would damage their credibility.
The market appears to be pleased with Chairman Powell’s performance today, as it fully recovered its losses after the FOMC statement and is now focusing on the session high. Yields returned to their pre-FOMC level of 2.17%.
close. My initial interpretation of FX price action is a possible mechanical reaction to “risk-on” and short covering before Europe and Asia start running.
However, I think the Fed’s hawkish tone is dispelling concerns that the Fed is behind the curve and inflation is out of control. stock market like this.
Still, the objective side of my trading screen flashed warning signs, the Fed swung from one extreme to the other, and Powell’s entire communication pointed to overheating. So while the Fed is targeting a soft landing, this is a policy of a hard slowdown.
And don’t think you’re out of the ADR frying pan. Amid a 39% rally in the KraneShares CSI China Internet ETF (NYSE: ), Sens. Marco Rubio and Chris Van Hollen reiterated that Chinese companies must fully comply with U.S. rules to continue trading on the NYSE.
Oil prices edged lower on the back of higher oil prices.
Oil prices fell below $100 a barrel for the first time in two weeks as talks between Russia and Ukraine continued. Reuters also reported signs of progress on the Iran nuclear deal after Russian Foreign Minister Sergey Lavrov said Russia had received assurances from the United States on trade with Iran. Trading has remained particularly volatile amid the uncertainty, with prices bouncing back and forth overnight after surpassing $13 a barrel since the start of the week.
Last week I suggested that everything is happening at warp speed these days and extrapolated that demand destruction would happen quickly. The one-off build in U.S. inventories should not be interpreted as demand destruction, but at least ease concerns about tight U.S. supplies.
Oil deals are still a little sticky. Oil was largely unchanged despite the latest headlines that Ukraine and Russia were moving towards a peace plan, stocks rose and fixed income fell, which has clearly eased pressure on oil (a bit lower, of course, but down $3) – these days among oil trading friends). One might think that even if the war does end, sanctions on Russia could persist, making oil supplies harder to obtain for longer.
Survived a hawkish FOMC on recession fears. I think gold took its cue from an inverted yield curve.
A historical review of the now-inverted 5s10 shows that the last two that happened (or were about to happen) were Y2K and before the GFC. This came after the FOMC, in the face of a more than 100 basis point rise in stocks and a blow to the dollar under pressure from Powell.
I think this reversal is the result of investors buying long-term TIPS to offset inflation risk; hence, the 10-year yield fell mechanically. I don’t see this as a sign of a recession, but as a reflection of inflation causing assets to underperform, so TIPS is considered a more solid bet.
Still, the main tool for tightening financial conditions is the real curve, and I continue to see real rates move significantly higher through 2022; therefore, higher reals should limit gold’s upside ambitions as a hawkish Fed should Every central bank has its doors open to maintain control over gold and fight inflation.
Currency markets today have a mechanical tendency to chase risk, so I don’t really believe in a post-FOMC rally. Having said that, a hawkish Fed does open the door for a more hawkish ECB iteration, and as we’ve seen in past episodes of market pricing of NIRP, the euro has skyrocketed.
And since ceasefire trades are becoming more popular, especially in energy markets, I think EUR/USD may hold a bid. Lower energy prices are good for the EU economy and therefore good for the euro.