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Morning Brief
The FOMC rate decision and meeting minutes gave the markets a better indication that the Fed are taking this rising inflation more seriously now, and that they are most likely to raise interest rates earlier than first believed. The projections suggest that there could be 2 rate hikes in 2023. They have had the talk about talking, about changing monetary policy, but have made no decisions or discussed further, based on the data that they have received so far. Which means they are still going to remove at least $120 billion of the highest-grade collateral out of the market, even though the commercial banks are desperate for it.
Fed Chair Powell in his Press Conference made it quite clear that at subsequent meetings from now on the topic of tapering will be considered more and should at some point the Fed feel it necessary to start a rate hike cycle, they will announce it well into the future and look to mitigate the need for a Taper tantrum. The FOMC have a dual mandate to maximise employment and maintain stable prices, so with employment well below pre-pandemic levels and CPI/PPI/PCE all rising faster, the evidence would suggest that the policies are slow to work at best or failing at worst.
Benchmark bond yields rose on the release of the FOMC announcement, as did the US dollar index. But I am expecting yesterday’s move to be unwound in entirety as nothing has changed in policy and Chair Powell said explicitly to not take the dot plots and projections as gospel as no economists have any precedent to make accurate forecasts.
The FOMC have increased their inflation forecasts for the year. It now sees inflation running to 3.4% this year, above its previous estimate of 2.4%. The central bank also slightly hiked its PCE inflation estimates for 2022 and 2023. There were questions around transitory inflation affects as Lumber was mentioned as a case study of what can happen after a supply shock, increases costs on increasing demand, for the market to then rebalance and prices drop as demand disappears. The price of lumber will have to come back down to value before companies can buy with confidence and pass on the costs. Also, as supply came on stream timber merchants and building merchants will be awash with new supply and maybe excess. Again, forcing the prices of lumber further down.
When asked about the economic growth projections slowing down into the future, Chair Powell said that the committee would welcome a >3% GDP rate and that this year’s base effects will be distorting the current high levels of GDP and that over the course of the next couple of years increasing GDP figures are unlikely, but a growing economy is.
So how did the markets behave during all of this?
Initially the dot plot projections for rate hikes in 2023 were translated into risk-off and equities dropped, yields rose, and the US dollar appreciated. After the comments about taking these projections with a ‘Big Grain of Salt’ the risk markets moved off their day’s lows but yields closed at their days high.
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The US dollar index ripped higher up to $91.385 where it hung out into the start of todays London session. The move in the DXY from the swing high on 29th March 2021 to the 24th of May 2021 swing low has been corrected 50% now. $91.50 is basically the mid-point so based on that alone we could have sellers enter back in as nothing has fundamentally changed, but technically the price of US dollars is maybe high enough now. The price action from mid-April formed a little balance area and for today I am expecting that to hold as resistance. If the DXY trades above $91.80 that will open up prices $92 initially and then the $93’s. So, if you do go short the US dollar today, keep an eye on $91.80 as a possible invalidation of that idea.
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The EURUSD traded down to the 1.2000 psych level before pausing ahead of the London open this morning. The market structure that formed in mid-March did not act as support as it was previous resistance, and prices are now under the daily 200 ema. 1.1865 on the EURUSD is my mental stop should I find a good entry today at the 61.8% Fibonacci retracement, to go long.
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WTI nearly touched $73 per barrel yesterday but closed at the day’s lows and below its opening price. If the US dollar were to appreciate further today this commodity would fall back down to $66-$68 and the top of the previous range highs. The USDCAD on the stronger greenback traded higher and has now retested the trend line that formed between the 2015 – 2017 swing lows on the monthly chart. This was mentioned at the start of the week as being a great place to look for a retest of the breakout, in preparation for a continuation to the downside.
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The Aussie is struggling against the strengthening in the US dollar even though employment data release by the Australian Bureau of Statistics showed a really positive increase in employment change and a sizeable drop in the unemployment rate. Governor Lowe delivered a speech yesterday titles “From Recovery to Expansion” where he outlines how well the Australian economy was doing. He notes that the economy is still in the recovery phase but certain metrics like unemployment are at pre-pandemic levels now. Australia’s antipodean neighbour New Zealand posted expansionary GDP figures today. GDP beat expectations and rose 1.6% in the three months to March 2021, following a revised 1.0% contraction in the previous period.
