US stocks are weakening as Wall Street expects the Fed to remain aggressive with their fight against inflation and as Ford reminds us supply chain issues are still troubling.
Yields are surging as the inflation-fighting Fed is expected to remain relentless with the tightening of policy, which is raising the risk of a severe recession. The Fed begins its two-day policy meeting and while a 75-basis-point expectation is widely expected, the key messaging by Fed Chair Powell might be that rates will stay elevated for much longer than what the market is expecting. Powell wants this tightening cycle to remain powerful with the fight against inflation and he would want to see those rate cut bets get pushed out much further.
Riksbank joins 1% club
The Swedish central bank stunned FX markets with a 1 percentage point hike to 1.75%. The Riksbank reiterated that inflation is too high and that they will continue to be raising rates in the coming six months. This hike was the largest one since Sweden’s inflation-targeting regime was created in 1993.
The Riksbank is setting the tone for this week and expectations should grow for more central banks should err on the side of being more aggressive in fighting inflation.
US Data
The mixed August readings for housing starts and building permits still confirm the cooling of the housing market. Housing starts unexpectedly jumped higher, while permits plunged. Single-family permits are heading lower and that trend will likely continue given the weakening consumer and surge in rates.
FX/Treasuries
The short-end of the Treasury curve is skyrocketing as traders anticipate the 2-year Treasury yields to move above the 4% level. The last time the 2-year Treasury yield traded above the 4.00% level was in 2007 and right now it seems it will be only a matter of time before it continues with its ascent. The consensus view on Wall Street is for the Fed to take rates to 4.25%, but some still think that they may be done at 4.00%.
King dollar has been the primary beneficiary of the move in Treasury yields, but its recent gains are not matching the moves in fixed income. It appears that bullish bets on the greenback are waning and that could continue if the FOMC decision and updated forecasts signal the inevitable economic slowdown is quickly coming.
Crypto
Bitcoin is lower as risk aversion runs wild as rates continue to surge. The news is not all bearish today as the Nasdaq is poised to get involved with crypto. The Nasdaq is expected to launch a new Digital Assets unit that will offer crypto custody and help expand other services. The Nasdaq is not expected to launch a crypto exchange but this is a massive commitment to the cryptoverse.
Bitcoin’s fate will be determined by this week’s central bank decision fireworks, which could help fuel any selloffs to retest the summer lows. Peak pessimism is almost here for crypto, which is needed before longer-term money piles back in.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.
With more than 20 years’ trading experience, Ed Moya is a senior market analyst with OANDA, producing up-to-the-minute intermarket analysis, coverage of geopolitical events, central bank policies and market reaction to corporate news. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies.
Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news.
Based in New York, Ed is a regular guest on several major financial television networks including CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business and Sky TV. His views are trusted by the world’s most renowned global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Breitbart, The New York Times and The Wall Street Journal.
Ed holds a BA in Economics from Rutgers University.
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