UPCOMING EVENTS:
Everyday: Fedspeak.
Friday: Chinese PMIs, Eurozone Flash CPI, US PCE.
The last week was really packed with events and central bank meetings. In the end, it was really a tentative price action heading into the FOMC and a sell-off in pretty much everything out of it.
Maybe, the market finally accepted that the Fed is no longer there to support it, its only focus is inflation, and it will do whatever it takes to get it back to its target.
As a matter of fact, even though the Fed hiked rates by 75 bps as expected, the Dot Plot, which of course can change but still shows the consensus among participants, showed a higher than expected year-end and terminal rate FFR.
Moreover, Powell in his press conference echoed pretty much his resolute message at Jackson Hole.
Another big thing that stood out is the GBP plunge on Friday. This is what happens when you have the government pursuing an expansionary fiscal policy and a central bank making “dovish” hikes when inflation is at record highs. The market loses confidence in you, and you have bond yields skyrocketing and the currency selling off.
As DB notes "the policy response required to what is going on is clear: a large, inter-meeting rate hike from the Bank of England as soon as next week to regain credibility with the market.
And, a strong signal that it is willing to do “whatever it takes” to bring inflation down quickly and real yield into positive territory.”
The USD remains the only winner in the FX majors space thanks to its safe haven status, an aggressive Fed and a global recession.
This week is poor on the tier one data front with some important indicators released only on the last day of the week.
Nevertheless, we will have Fed members speaking this week every day. It’s likely though that the market will just keep on its business where it left the last week, that is general risk aversion.
On Friday, we will see the latest Chinese PMIs, Eurozone CPI and US PCE. The Chinese PMIs are expected to show again contractions although mild.
The Eurozone Flash CPI is expected to show the headline figure rising to 9.6% Y/Y from the prior 9.1% and the Core measure showing as increase to 4.6% Y/Y from the prior 4.3%.
The ECB is finally raising rates aggressively, but a recession is inevitable, and the EUR/USD pair is a one way down road. Lastly, we will get the latest US PCE report.
The Core PCE, which is the Fed’s preferred measure of inflation, is expected to show an increase of 0.5% M/M from the prior 0.1% and 4.8% Y/Y from the prior 4.6%. Core PCE is not that market moving as CPI is released earlier and the FOMC has that data before its meetings.
As a side note, I would also highlight that a war between Ukraine and Russia after the 27th of September cannot be ruled out if Ukraine attacks the annexed territories of Luhansk, Donetsk, Kherson and Zaporizhia. Such a scenario can add to risk aversion and become very ugly if we see a (although unlikely) direct conflict between NATO and Russia.
This article was written by Giuseppe Dellamotta.
