North American News
US stock markets rip higher as Powell rules out 75 basis point hike
- Closing changes for the main North American equity markets
- S&P 500 up 122 points to 4298, or 2.9%
- Nasdaq +3.1%
- DJIA +2.8%
- Russell 2000 +2.6%
- TSX Composite +1.4%
US 2-year yields fall 10 basis points as Powell dials back rate hike expectations
- Outside day in 2s
USD/JPY and the front end of the bond market are moving in tandem at the moment.
The thinking is that we might get a top here in the front end as we’ve priced in maximum hiking for now.
Powell did two things:
- He took 75 bps off the table for the next meeting
- He only put 50 bps on the table for the next two meetings (market was pricing in at least 3)
The market was looking for a signal that we’ve hit a crest in rate hikes and Powell offered that in the clearest terms. There’s a clear plan to get to around 2% or 2.50% then re-evaluate. Powell certainly indicated there could be more but markets love certainty and two 50 bps hikes offers certainty through the summer.
Powell Q&A: Powell: We are not actively considering 75 bps
- Comments from Powell in the Q&A with reporters
- We expect job creation to slow
- Wages are running high
- We like to think that wage inflation will moderate, that’s our expectation
- Vacancies are at an extraordinarily high level
- We have a good chance for a ‘soft or softish landing’, cites strong labor market and balance sheets
- It will not be easy to achieve a soft landing
- If we expect what we expect to see then we’ll have 50 bps hikes on the table at the next two meetings
- We will not hesitate to go above neutral if needed
- We are looking at very broad measures of financial conditions
- Supply side issues put central banks in a difficult situation
- We are absolutely prepared to move policy to restrictive levels if needed
The US dollar fell and risk trades jumped when Powell said that they’re not actively considering a 75 bps hike. The market was looking for a 50% chance of that a few days ago, 22% after the Fed statement and now just 10%.
That was as clean of a headline trade as I’ve seen in a long while.
ISM April US services index 57.1 vs 58.5 expected
- Service sector survey from the ISM
- Prior was 58.3
- Employment 49.5 vs 54.0 prior
- New orders 54.6 vs 60.1 prior
- Prices paid 84.6 vs 83.8 prior – record high
- Business activity 59.1 vs 55.5 prior
Comments in the report:
- Pricing pressures and product availability issues continue to be extremely problematic.” [Accommodation & Food Services]
- “Mortgage rates have skyrocketed. While relatively low from a historical perspective, the new rates — combined with historically high home prices — will temper new home demand at some point over the next 12 months.” [Construction]
- “Large construction projects have been mostly constrained due to continued supply chain issues and large cost increases. Continued shortages in account management continue to be a source of frustration for day-to-day operations and service.” [Educational Services]
- “Restrictions lifted as COVID-19 case volumes drop, allowing for more elective procedures and reduction in (average) length of stay. Freight costs are rising.” [Health Care & Social Assistance]
- “Overall business has softened.” [Information]
- “Business remains strong, only dampened by shortages in labor, increased material costs and lengthy lead times.” [Management of Companies & Support Services]
- “Talent shortages continue to make it difficult to get work done at companies across many industry sectors. Light industrial labor is in high demand, but supply gaps still exist. Wages continue to rise in nearly all labor categories, contributing to the rise in prices of goods and services.” [Professional, Scientific & Technical Services]
- “Inflation, supply chain issues and access to qualified workers continue to be issues. There are still lingering effects from the pandemic, although those seem to be subsiding. The future impacts of the war in Ukraine are unclear.” [Public Administration]
- “Continued delays due to supply chain logistics issues; increased pricing across the board.” [Retail Trade]
- “Fuel and chemicals continue to go up in price.” [Utilities]
- “Cost pressures beginning to slow demand.” [Wholesale Trade]
Federal Reserve hikes rates by 50 basis points, as expected
- Highlights of the May 4, 2022 FOMC rate decision
- Decision was unanimous
- Band is now from 0.75% to 1.00%
- At the previous meeting, the Fed hiked by 25 bps to 0.25-0.50%
- No mention of anything indicating a faster or ‘expiditious’ pace of tightening, as speculated by some
- At last look the Fed funds market is priced at 90.5% for a 50 bps hike and a 9.5% chance of 75 bps
- Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong
- Added the line: “The Committee is highly attentive to inflation risks.”
- Job gains now described as ‘robust’ vs ‘strong’ previously
- Balance sheet runoff will begin on June 1
- Balance sheet runoff caps of 60B for Treasuries vs 60B expected
- Balance sheet runoff caps of 35B for MBS vs 35B expected
- Balance sheet runoff phased in over 3 months vs 3 months expected
There was some speculation the Fed could include the line that Powell used — ‘expeditious’ — in his recent comments but that’s not included. The decision was also unanimous. Both those are slightly dovish surprises and that’s why the dollar is lower immediately.
Fed Chair Jerome Powell will host a press conference at the bottom of the hour. We will look for commentary on inflation and the likelihood of a 50 or 75 bps hike at the next meeting.
Commodities
Gold Price Forecast: XAU/USD soars as Fed Powell puts the breaks on 75bps hike sentiment
- Gold is benefiting from safe-haven flows and a dialling back of an uber hawkish Fed.
- Fed’s chairman, Powell, has taken out 75bps rate hike speculation in markets.
At $1,885, the gold price is rallying some 0.87% on the day, breaking out of sideways consolidation and taking on a critical daily resistance area after Federal Reserve chairman, Jerome Powell disappointed the more hawkish of the financial market’s participants.
Fed futures were initially pricing in a higher chance of a 50 basis point hike at the June meeting before Powell spoke, but the US dollar has come under strong selling pressure during the press conference. Powell stated that 75bps hikes were not on the table and that it will be 50bps at the next two meetings if the members of the board see what they expect to see.
The comments have stripped the 2-year Treasury yield down to a low of 2.614% so far, sinking the US dollar index to 102.50 from the post-Fed interest rate decision highs of 103.61. The gold price has benefitted from a combination of the dialling down of 75bp hikes and safe-haven flows given the uncertainty expressed by the Fed over the Ukraine crisis.
Meanwhile, a press release has also been published with the plans for reducing the size of the balance sheet.
The Committee intends to reduce the Federal Reserve’s securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA). Beginning on June 1, principal payments from securities held in the SOMA will be reinvested to the extent that they exceed monthly caps.
For Treasury securities, the cap will initially be set at $30 billion per month and after three months will increase to $60 billion per month. The decline in holdings of Treasury securities under this monthly cap will include Treasury coupon securities and, to the extent that coupon maturities are less than the monthly cap, Treasury bills.
For agency debt and agency mortgage-backed securities, the cap will initially be set at $17.5 billion per month and after three months will increase to $35 billion per month.
Gold technical analysis
Gold has rallied into the daily resistance from an area of demand from where the price last reacted in a significant fashion leading to what would be fresh cycle highs. However, the bulls need to get above $1,900 to mark a more convincing bullish case for higher on the charts. Failure to do so could otherwise lead to a downside extension towards $1,820 in due course.
EU oil ban speculation puts crude oil on the brink of a break
- WTI climbs above $107.50
I don’t believe in any market moves that happen right before the Fed but I’ve been amazed by the strength in oil in the past few weeks despite:
- Weak GDP readings and falling economic data
- China lockdowns
- Terrible equity market sentiment
Yet oil is a hiccup away from the best daily close since March 25. More importantly, this narrowing wedge pattern is in danger of breaking to the upside. I would like to see a rise above $110 to confirm it but this is a chart that bears very close watching.
EU News
European stocks stumble ahead of the FOMC decision
- Closing changes for the main European bourses
- Stoxx 600 -0.9%
- UK FTSE 100 -0.8%
- German DAX -0.4%
- Italy MIB -1.3%
- Spain IBEX -1.0%
- French CAC -1.1%
Other News
US says its preparing for an agreement with Iran on Nukes AND for no agreement with Iran
- Preparations being made for either outcome
US state department says that the US is now preparing equally for mutual return to compliance with Iran nuclear deal as well as scenario in which there is not an agreement.
Goldman Sachs revises its FOMC July forecast to +50bps from +25
- Goldman Sachs in response to Powell and today’s FOMC
Goldman Sachs revision:
- Chair Powell said that 50bp increases in the funds rate should be on the table at the next couple of meetings
- We already expected a second 50bp hike in June and are revising our Fed forecast to include a third 50bp hike at the July meeting too
GS were at +25bp for July previously
Cryptocurrency
The culmination of the battle for the trend in Bitcoin
- All eyes are on the FOMC.
Bitcoin fell 1.8% on Tuesday, ending the day around $37,700 and temporarily below a meaningful support line. Notably, it was a cryptocurrency selloff as stock indices developed gains. The demand for risk recovery has likely returned interest in cryptos that went into the green on Wednesday.
Locally, bitcoin manages to maintain its balance on support, which has withstood the onslaught of sellers over the past four months. On the other hand, we see a sequence of increasingly lower local peaks since the last days of March. The lines of these two trends have reached their intersection point with a potential climax later today.
More often than not, the outcome of such triangles is to break the support because if it goes under $38K, we might see a rising wave of selloffs. A return to the uptrend will require confirmation with a decisive move above $40K, the area of previous local lows. Today, the market driver will be the FOMC, whose decisions and comments could reverse or reinforce the multi-week trend of the dollar leaving and curtailing demand for risky assets.
The cryptocurrency market is approaching the big event in a state of extreme fear, with the relevant index dropping 6 points to 21 by Wednesday. The total capitalisation of the crypto market, according to CoinMarketCap, fell 1.3% overnight to $1.72 trillion. According to Morgan Stanley, bitcoin’s dependence on the stock market undermines the cryptocurrency’s potential as an inflation risk hedge. Meanwhile, the correlation between bitcoin and a protective asset such as gold has fallen to its lowest level since 2018.
Brian Armstrong, Coinbase CEO, believes that despite the volatile state of the crypto market since early 2022, the number of cryptocurrency users will increase 5-fold over the next 10-20 years and reach more than 1 billion people. The US Securities and Exchange Commission (SEC) creates a new unit to oversee the crypto market and expand its staff to combat digital fraud. Argentina’s largest banks, Banco Galicia and Brubank, have announced that their customers will soon be able to trade in cryptocurrencies.