The Fed is preparing the markets for multi-rate hikes, a faster taper, and possibly the reduction of the Fed’s balance sheet. The last time that happened we had the ‘Taper Tantrum’ and a market correction. This time the economy is in a different place. Fingers crossed it’s a better place.
The Nasdaq leading companies, Apple, Microsoft, Amazon, Facebook, Tesla, and Google are all pushing higher, and at the London, close had a good chance of getting the rest of the index to follow as yesterday’s high was taken. US 10-year notes are slightly higher today though the yield is still hovering around the recent highs at 1.759.
Just before the US futures opened Fed’s Mester who is a voter this year said if the economy looked like this in March, she would support a hike at that meeting. The economy is on a good track even as inflation remains more persistent. Fed’s George said her preference is to run down the balance sheet earlier rather than later and that the Fed’s current accommodative policy stance is out of sync with the economic outlook.
Today’s focus is all about the Fed and their forward guidance and in particular what Fed Chair Powell would say in his testimony. One of his comments was that
“If we see inflation persisting for longer than expected we will have to increase rates more overtime”.
Just as a side thought when you hear that after so many years of loose accommodative policy and low inflation, I can’t help but wonder if a tighter policy would increase the likelihood of inflation?
Chair Powell was happy with the way employment was going and stated that seeing rising wages was also a good thing, but they would monitor them. He and the FOMC expect inflation to stay at these levels until the middle of the year but will adopt a longer policy if inflation sticks around for longer. He also thinks that US debt is on an unsustainable path, and it is best to start dealing with it soon. There is also a consensus that the US economy is in a completely different place from the last Fed tightening cycle.
The USDJPY has been tracking the US 10-year yields for the most part of the rate hike expectations along with the rising energy prices too. The sentiment indicator on the ActivTrader platform shows that an extreme reading of 88% of traders are shorting the USDJPY, which is usually a sign that the trend higher is to continue.
I have been monitoring the 115.30-115.50 zone as that was the prior swing high from late November 2021. It looks like the market dipped into the 115.00 and found buyers and is now looking to build a bullish market structure. If the USDJPY gets back above 115.80 this should signal a start to the new leg higher.
Interestingly despite the talk of higher interest rates and possibly multiple rate hikes if inflation persists the Nasdaq 100 is back above the 15,500 level. The double bottom formed during December has been swept and in a “look below” trade, any liquidity resting there in the form of Sell Stops has been used by these buyers to propel prices higher. 16,600-16,700 and new all-time highs could be the next test, assuming we get through the daily 20 & 50-period moving averages.
The forex heatmap is skewed towards risk except for a weakening New Zealand dollar. The US dollar’s demise has resulted in a test of the daily 50-period EMA, so I am thinking dynamic support is soon to be found there. A break lower than the $95.50 and we could be in for a move lower and I would assume that would not be the base case considering how Hawkish the Fed officials were today.