Australian dollar to the moon with Fed reflation!

See the latest Australian dollar analysis here:

Macro Afternoon

DXY was pounded last night as the Fed doved up:

AUD and commods to the moon:

Junk too:

The curve is still inverted:

Stocks yeh!

Westpac has the warp:

Event Wrap

The US FOMC announced a 75bp rate hike to a band of 2.25% to 2.50%, as was widely expected, and signalled further tightening: the Committee “anticipates that ongoing increases in the target range will be appropriate.” The vote was unanimous: 12-0. It also confirmed that the balance sheet will continue to be reduced. There was reiteration that it is “strongly committed to returning inflation to its 2% objective” and it is “highly attentive to inflation.” On the economy, it said “recent indicators of spending and production have softened,” in contrast to June which said “overall economic activity appears to have picked up.”. In his press conference, Chair Powell said it was appropriate for the Fed to move expeditiously and to front load rate hikes, but at some point it will be “appropriate to slow down.” He said there is some evidence that labour demand may be slowing, albeit from very high levels.

Event Outlook

Aust: Card data suggests retail sales should post a solid gain in June, concealing the backdrop of weakening confidence (Westpac f/c 0.6%). A strong lift in export prices is anticipated in Q2 given the strength of commodity prices (Westpac f/c: 8.0%), while a higher AUD likely tempered the lift in import prices from global energy inflation (Westpac f/c: 2.0%). The Federal Treasurer will also deliver a Ministerial Economic Statement to Parliament.

NZ: ANZ business confidence is set to remain low in July as price pressures remain elevated.

Eur: Inflation and energy concerns will continue to weigh heavily on economic confidence (market f/c: 102) and business confidence.

US: The broad-based slowdown in activity growth will produce another lacklustre GDP print in Q2, driven primarily by weakness in consumption (Westpac f/c: -0.5% annualised; market f/c: 0.4% annualised). Initial jobless claims are slowly starting to lift from historic lows (market f/c: 250k) and the Kansas City Fed index should highlight an increasingly fragile manufacturing outlook in July (market f/c: 3).

Honestly, what is the Fed thinking? Does it want to squash inflation or not? The job is clearly incomplete in the US yet here it is reflating markets with hope.

The bear market rally has a new leg in front of it before Chair Powell wakes in fright.

Houses and Holes
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  1. happy valleyMEMBER

    Read somewhere that the Fed now has ~400 plods with PhDs in Economics, compared with ~220 plods with PhDs in Economics around the time of the GFC.

    Never has so much “rocket science” brainpower been appointed by so few to achieve so little that is truly useful?

    • pfh007.comMEMBER

      I suspect the thinking is that by absorbing so many PhD’s in economics the Fed is preventing them from doing damage out there in the broader economy. Warehousing volatile economics PhD’s.

      A bit like how the Fed likes buying up bonds and mortgages because all that low grade paper out there blowing around in the economy might undermine confidence.

  2. All leading indicators show massive deflation on the horizon. The Fed does not want to destroy the monetary system and society along with it, they have family and friends too.

    It was only a matter of time till the fed acknowledged the forward looking economy and here we now are. Bottom is probably in. Next stage of monetary expansion is not too far off. Now is the time to go majority assets, those who don’t/can’t are truly screwed.

    Structural inflation, after deflation is stopped, is on the cards from now on.

    • Atom Heart MotherMEMBER

      All leading indicators show massive deflation on the horizon. The Fed does not want to destroy the monetary system and society along with it, they have family and friends too.

      There is a room full of people at the RBA going ‘huh?!’

      They will be the last Central Bank in the world to spot the passing of inflation and presumably jacking those rates up – for which there may be a good case at the moment – at a point the rest of the world will be watching on at what looks like a central bank beating up a corpse.

      Somewhere along the line they will be the Central bank yelling out ‘Yiiihaa!’ and whooping up tighter rates, blithely unaware the other central banks have changed direction and are heading not just towards looser rates, but most likely another serving of freshly printed money (which will go first to those who don’t need it, and presumably will want it to attract a return, so presumably will go heavily onto ‘Higher Rates’ jockeyed by the RBA). That should help smooth out any Australian business (if there are any left) inclined to compete with the rest of the world, at the same time as kneeing the cojones of the recently pawned new home buyers who were suckered into a lifetimes fiscal servitude by an RBA bookie touting ‘not to 24’. By the time the RBA does get around to loosening monetary policy, let alone printing money, we can be sure there will be a pretty gun shy generation of home buying aversion.

      One hopes the Government and RBA send a card to Vladimir Putin for helping nail commodity prices higher at this all important time…..

  3. A slowing/contracting economy will see the inflation rate peak and slow, but will it slow enough before the fed changes course?
    The fed will always target economic growth ahead of inflation.
    And if they change course with high inflation, there could be a huge sell off in the bond market.

    • C.M.BurnsMEMBER

      “The fed will always target economic growth ahead of inflation.”
      They are explicitly stating that they are targeting inflation. And only inflation. This has been the message for the last 6 months.

      • My point was whether they would change course with the deteriorating economic environment, despite high rates of inflation.
        GDP comes out tomorrow.
        If it is negative, will they still raise rates or pause?

  4. There are four words that should be etched into every investors mind- don’t fight the fed
    If the fed is raising rates the share market has difficulty sustaining valuations particularly when they are high.Who knows what the future holds(it is all conjecture) but currently they are raising rates!

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