Jerome says slower, but higher

Jerome Powell abated the latest risk rally yesterday, saying that the rate hikes will slow down, but the levels will go higher. Equities sold off, the yields jumped, the dollar gained, and hopes of seeing the end of the market turmoil got completely dashed.  

I told you

…that Jerome Powell wouldn’t let a rally in the US stock and bond markets develop further because it would be vertically against his goal of slowing inflation in an economy where inflation is not showing signs of abating and the labour market isn’t tightening yet. The latest ADP report released yesterday in the US, again, exceeded analyst estimations, and printed a number above 200’000. 239’000 to be precise.  

At 2pm local time yesterday, when the FOMC’s written decision came out, equities first rallied because, the 75bp hike was already fully priced in, and the part of the statement saying that the Federal Reserve (Fed) would ‘take into account the cumulative monetary tightening that has occurred thus far, and the lagged effects of its policies’ has been taking as being relatively dovish.  

But Jerome Powell adding that the ‘ultimate level of interest rates will be higher than previously expected’ didn’t please investors.  

The US 2-year yield soared to 4.90%. The Dow Jones lost more than 1.50% and slipped below its 200-DMA, the S&P500 dived 2.50% to below 3760, and Nasdaq, the most rate sensitive of the major US indices, dived more than 3% to below the 11000 psychological mark, and is set to extend losses toward 10200 in the continuation of the ABCD pattern building since the end of March, this year.  

In the FX, the prospect of higher terminal rate from the Fed boosted the USD appetite. The dollar index gained yesterday, as the EURUSD slipped again below its 50-DMA, Cable slipped below 1.14, the dollar-franc is back above parity, the dollar-yen is set for another advance to 150 on the back of the diverging rate prospects between the Fed that is now set to increase rates slower, but higher, and the Bank of Japan (BoJ), set to do nothing, for now.  

Gold is also under the pressure of a stronger US dollar and the higher US yields. The precious metal saw resistance into the 50-DMA yesterday, before diving to around $1630 per ounce this morning. The yellow metal will likely extend losses toward the $1615/1620 support, if broken the $1600 will be the next target.  

Bitcoin, on the other hand, is surprisingly resilient to the broad risk selloff. The coin maintains support above the $20K psychological mark, and lost only about 1.60% yesterday, despite a more than 3% selloff in Nasdaq. The lower correlation between Bitcoin and other risk assets, increases Bitcoin’s diversification power, but the risk-off environment remains unideal for a bullish market to develop further. 

Oil up despite hawkish Fed  

The barrel of American crude rose to $90, as the latest EIA data showed that the US crude inventories fell by more than 3-million-barrel last week, much faster than a 200’000 barrel decline expected by analysts.  

Though, the Fed-induced selloff in broader risk assets certainly limited the upside appetite in oil, and we will hardly see the US crude pick up a good momentum above $90, as recession fears should give cold feet to investors who would, otherwise buy oil, at the current prices. 

BoE to hike by 75bp as well

The Bank of England (BoE) is also expected to raise rates by 75bp today, but that expectation is down from around 100-150bp hike expected when Liz Truss was busy shaking the financial markets with her crazy mini budget.  

Today, the BoE should no longer act twice as aggressively to compensate for the actions of an irresponsible government, but it still must fight the rising inflation in Britain. The latest data showed that British food price inflation soared to a record annual rate of 11.6% in October. Add to that the soaring energy bills, you get a scary picture.  

And there is nothing that the BoE could do about it except from… raising the rates hoping that the war in Ukraine would magically end with peace one day.  

Only good news from that front, is that Russia agreed to resume the grain deal, pulling wheat futures to levels at which we started the week.