Policy error time. The Fed has blinked and the Australian dollar just broke. Don’t cheer too loudly. My risk case for a decent market correction just firmed up. DXY blasted higher:
Australian dollar was pulverised and the giant head and shoulders top is back in play:
Gold was poleaxed. Oil held up but all commodities are on suicide watch now:
Slowing China, hawking Fed, overcrowded longs. Sell metals:
EM stocks trapdoored:
But junk is still fine. This is the market to watch now for early warning on a Fed policy error:
US yields jumped but the curve dumped. Already a whiff of policy error here:
Stocks held up all things considered, with growth doing better than value:
Westpac has the data:
Event Wrap
The Federal Reserve’s FOMC meeting did not change policy settings, and the statement text was similar to April’s, as was widely expected, but it did surprise markets by showing the median of a dot-plot of Fed funds rate projections rose in 2023 by 50bp, from 0.125% to 0.625%. And 7 committee members now expect a hike as soon as 2022, up from 4 at the March meeting. Economic forecasts were mostly revised to reflect improvement seen to date, noting that “economic activity and employment have strengthened,” while “inflation has risen, largely reflecting transitory factors.”. The core PCE inflation forecast for 2021 was revised to 2.9%-3.1% from 2.0%-2.3%. Also of note, the Fed raised IOER (excess reserves rate) and the reverse repo rate by 5 bps, to 0.15% and 0.05%, respectively. On tapering, Chair Powell said in the press conference that they were “talking about talking about” it.
Canadian CPI inflation was firm at 3.6%y/y (vs. est. 3.5%y/y), the core measures also rising. The core-trim measure rose to 2.7% from prior 2.3% (est 2.3%), core-median rose to 2.4% (est. 2.3%, prior 2.3%) and the core-common rose to 1.8% from prior 1.7%.
UK CPI inflation surprised to the upside, though the ONS highlighted that transport costs were responsible for the bulk of the uplift and is thus seen as transitory. Headline CPI rose to 2.1%y/y (est. 1.8%y./y), with core rising to 2.0%y/y (est. 1.5%y/y). PPI output inflation rose 0.5%m/m to 4.6%y/y.
Event Outlook
Australia: The May jobs report is expected to show employment rose by 30k. We also expect the unemployment rate rose from 5.5% to 5.7% (market consensus is 5.5%) due to a rebound in participation. RBA Governor Lowe gives a speech on “From Recovery to Expansion” at 10am in Toowoomba, Queensland.
New Zealand: We expect a 0.6% rise in GDP for the March quarter, following a fall of 1.0% in December. While the absence of international tourism is likely to continue disrupting the seasonal patterns in the data, the domestic economy continues to be supported by a strong housing market which many sectors have benefitted from.
Eurozone: CPI inflation in May is expected to be finalised at a 0.3%m/m, 2.0%y/y pace.
The change agent was Fed forecasts which were mostly upgraded:
And the dot plot projections which showed 2023 rate hikes and a building quorum for 2022:
And that was that. Yesterday’s China data was weak and weakening. Now we have a Fed moving to a more hawkish stance. Soon we will have a peak in post-COVID supply-side frictions and Wall Street’s commodity bubble has already begun to burst.
The inflation panic merchants are about to deflate the entire cycle and the Australian dollar with it.
