Hike rates

All eyes on BoJ amid global rate hike race far from close

Stocks sold off aggressively, reversing post-pop and more. The narrative returned to the Fed needing to hamper the economy to control after it capitulated 75 basis points from its upward trajectory of 50 basis points per meeting.

And weaker US data didn’t help the market or the cause. at 229k, consensus expected a pullback to 217k, the prior week revised a bit higher. down 5.9 points to 3.3, the lowest since May 2020.

But if the Fed opened the door to a hawkish oversized G-10 central bank pivot, the and the were more than happy to push through with others joining the signal. No central banker worth their salt would put their inflation-fighting skills on the line and import higher energy inflation via a weaker currency.

And in what is a very worrying signal for equity investors, given the broader index’s sensitivity to rising bond yields, is that the global race to higher rates is far from over.

The has been down 12% in the past two weeks. The big downward movement was widespread with severe selling for all risk groups thanks to fallout from the FED like “Financial conditions have tightened…and that’s a good thing.” Yesterday, Powell confirmed comments made by former New York Fed Chairman Dudley in April, hence the reading that the Fed wants tighter financial conditions regardless of how low stocks are. In other words, the legendary “Powell Put” is put aside.

The Fed is encouraging tighter financial conditions to stem inflation as equity fundamentals deteriorate and economic activity may just pick up. So don’t expect the economy to save the stock market. This is a tough setup no matter how bearish the sentiment may be.

Oil

prices rose on Thursday in a rash reaction after the United States announced new sanctions against Iran.

Indeed, in a shrewd move by the US administration to tighten sanctions on Iran, it provides a much improved sounding board for Middle East security engagement ahead of the US President’s visit to the Middle East. East, where the discussion will most likely turn to the swing producer OPEC upping its game and delivering more barrels and stragglers to catch up on their quotas.

Faced with a constant threat of drone attack from Yemen’s Houthi rebel group, an Iranian proxy, Middle Eastern producers will be more than eager for the United States to show a more meaningful commitment to Middle Eastern security. And while it’s unclear what such an engagement would entail, one would have to assume that the composition would be like “oil for security” via a defense engagement.

On the inflation front, rising oil prices are the main driver of consumer price inflation around the world; let’s face it, oil is everywhere. It permeates our daily lives in ways we never thought of. So with the Fed and other central banks now focusing on headline inflation, not energy, this suggests they are on a mission or even risk a national recession for headline inflation to be on target. Powell says, “We are responsible for inflation in law, and inflation means headline inflation, so that’s our ultimate goal.”

While that doesn’t mean oil will crash, it could mean that this year’s meteoric 55% rise could run out of steam if rising energy prices continue to force the Fed and other central bankers raise rates in economically restrictive territory.

As I have suggested in the past, given the global shortage of supply, there are only two ways oil prices could fall 1) a global recession and 2) OPEC delivering more than barrels.

Gold

finds support in dollar weakness, and the global central bank is willing to risk a recession by raising rates to keep inflation under control. Economic data has already started to turn around, suggesting that after the series of massive rate hikes at the start of the period brought inflation under control, rate cuts will start to be postponed in 2023 to repair the economic damage left in the warmongering wake.

Asian EM FX currencies lagged the G10 amid significant USD reversal. The DXY is down 1.4% as the market plays the G10 central bank catch-up theme following the change in the SNB and BOE.

If the FX and other Asian currencies start to catch up with the G-10, we could see a recovery in physical demand from the Asian community for gold which remains subdued due to the weakness of the local currency.

Fueled on the sidelines, the market returns to the geopolitical drivers that should continue to support gold in a world of inflationary pain.

Exchange

The market is playing the theme of the G10 central bank catching up following the change in the SNB and the BOE, and in other words, Fed warmongering does not occur in a vacuum as other central banks are more willing to join the race to raise rates.

Focus on the BoJ as volume surged to near 40 as many expect a change in the BOJ. I imagine that G10 FX will be criticized if the BoJ disappoints.