The week starts on a cautious note, as the Federal Reserve (Fed) rate hike expectations intensify the selloff in global stocks and bonds, while pushing the US dollar higher against most majors.
Friday’s US PCE data was bad. We knew, from the earlier releases that US inflation wouldn’t slow as much as expected, but Friday’s PCE data showed that not only inflation didn’t slow in January, but headline figure ticked higher to 5.4% from 5.3% printed a month earlier, and core inflation ticked higher to 4.7% from 4.6% printed a month earlier. The latter fueled the Fed hike expectations, because a slower-than-expected easing in inflation is one thing, but rebound in inflation is another thing. And the latter is much less cool for the Fed, and the Fed expectations. A rebound in inflation is the worst nightmare for the Fed.
And if the PCE drama was not enough, personal spending surged 1.8% in January, the strongest burst since March 2021, and the University of Michigan’s consumer sentiment index hit a 13-month high this month. It’s still much lower than the pre-pandemic levels, yes, but it also means that it has ways to recover.
In summary, the tight US jobs data, strong spending and improved sentiment may sound nice to you, but it sounds horrendous to the Fed. A new study that was presented at a conference in New York on Friday now suggests that the Fed should maybe hike rates all the way up to 6.5% to win its battle against inflation in the US.
As a result, the US 2-year yield is pushing above the 4.80% mark, the 10-year yield is flirting with the 4% mark. Activity on Fed funds futures now assesses just slightly less than 30% probability for a 50bp hike at the FOMC’s March meeting. This probability is up from below 10% at the start of this month.
The S&P500 slipped below the 50-DMA (3980) and tested the 200-DMA (3940) to the downside, and closed what was the worst trading week since the start of the year 2.7% down, and below the 4000 psychological mark. Nasdaq, on the other hand, pulled out the major 38.2% Fibonacci support on the latest rally, tested its own 200-DMA to the downside, and closed the week in the bearish consolidation zone and below the 12’000 psychological mark.
And all indicators point at a deeper selloff as long as the higher Fed discussions remain heated.
FX and commo
It becomes increasingly clear that we will see a pause in the USD downside correction. The US dollar index is now clearly headed higher.
In EURUSD, a further fall to and below 1.05 is just a matter of time, and the last support to the September to February rally stands near 1.0470, if cleared will send the pair into the medium term bearish consolidation zone, with prospect of further fall to 1.02-1.03 range.
And a softer euro will then make the energy imports more expensive for the Europeans yet again, and spur the European Central Bank (ECB) rate hike expectations.
Hawkish ECB bets will certainly not do much to tame the strong-USD-led inflation, but a more aggressive policy rate response from the ECB would be bad for European businesses, and weigh on European stocks.
Rising US yields and the stronger US dollar hint at further decline in gold prices, as well. Gold cleared a key Fibonacci support, the 38.2% retracement on the November to February rally, and starts this week in the bearish consolidation zone, with the next natural target for the bears standing at $1775, the 200-DMA.
Crude oil continues struggling. Oil bulls never really bought the Chinese reopening story, nor the sharp decline in Russian output. But they might well play the rising recession odds that come along with the tighter central bank policies around the world. As such, sellers are certainly waiting to sell US crude into the 50-DMA, a touch below the $78 per barrel.
Copper futures, on the other hand, sank below their 50-DMA for the first time since November in COMEX, as the higher rate prospects weigh on copper appetite, which is a good gauge of global growth.
Finally?
In Europe, Britain’s Rishi Sunak and EU’s Ursula von der Leyen will meet today to finalize the Northern Ireland drama, which could soften barriers in a country that is willing to remain half seated in Europe and half seated in the United Kingdom, while the UK and Europe part ways. There is however little chance today’s annoucement, if any, solves the problem entirely. DUP is expected to oppose.
Mr. Sunak was expected to make an announcement last week. He didn’t. And even if it did, I am not sure it would change the course of sterling. The pound is now below 1.20 against the US dollar as a result of a broadly stronger greenback, and is about to slip below the 200-DMA. Further retreat to 1.1650/1.17 band is on the cards.
