Daily Market Comment – Fed to roll out another shock-and-awe rate increase

  • Fed triple-barreled rate hike locked in, all eyes on Powell
  • Euro gets crushed by soaring gas prices, dollar capitalizes  
  • Decent results from Google and Microsoft calm some nerves

Fed: Inflation vs growth 

The spotlight will fall on the FOMC decision today. Market pricing suggests a rate increase of three-quarters of a percent is essentially a done deal, with a chance of around 10% for an even bigger move of a full percentage point. Admittedly though, that doesn’t seem realistic as even arch-hawks like Waller did not support it and the Fed doesn’t like to shock markets. Instead, all the action will come from Chairman Powell’s commentary. 

It will be a tough balancing act. With inflation still running above 9%, Powell has to strike a forceful tone and reaffirm they will do whatever it takes to extinguish it. Yet this is not the time to be reckless either as the economic data pulse is weakening at a stunning pace. Business surveys suggest inflation is losing its punch and growth is evaporating, worker layoffs are becoming more widespread, and the housing market is cracking.  

Monetary policy works with a lag of several months, so the risk here is that the Fed overdoes it. If they slam on the brakes too hard now that demand is rolling over, that could cause a deeper recession right as price pressures start to cool off. That’s precisely the nightmare scenario the Fed wants to avoid. 

The bottom line? While it is too early for Powell to signal explicitly that rate increases will slow down, there’s a strong chance he falls back on data dependency. Leaving the pace of tightening to be determined by incoming indicators in an environment where they are deteriorating quickly might be interpreted as a soft signal the Fed is getting cold feet, taking the wind out of the dollar’s sails. 

Euro’s energy troubles

It was another bruising session for the euro, which came under heavy fire as European gas prices jumped by 20% after Russia warned of reduced flows from its largest pipeline. There’s a stockpiling race going on, with various European nations scrambling to secure as much gas supply as possible ahead of the winter, so that the Kremlin doesn’t have as much leverage over their economies. 

It’s been a dreadful month for the euro. Even a powerful rate increase from the ECB could not turn the tide for the beleaguered single currency, which is staring down the barrel of a harsh recession according to the latest business surveys. The prospect of energy rationing and the resurgence of political risk in Italy are not helping. 

The natural beneficiary from the euro’s latest troubles was the US dollar, although the British pound also managed to shine despite the relatively sour mood in riskier assets. Elsewhere, the latest inflation readings from Australia were a touch softer than expected, curbing speculation about a jumbo rate hike from the RBA next week. That initially dealt a minor blow to the aussie, although it later recovered. 

Wall Street bounces back

In the equity market, it was a session characterized by nerves around earnings and the upcoming Fed decision. All that changed after Wall Street’s closing bell when Google and Microsoft reported. Both companies missed on earnings and revenue, yet their share prices soared in after hours trading as Google topped estimates for advertising revenue while Microsoft upgraded its guidance for the rest of the year. 

It’s not that the results were stellar but rather that so much caution was priced in ahead of the releases that enabled their shares to rally in relief. The sky is not falling for these tech titans and if Meta Platforms echoes a similar message when it reports today, it could add some more fuel to the recent recovery.

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