Friday's inflation data from the United States for May brought high volatility to the financial markets. Bulls have nothing to be happy about, but market bears have another reason to be happy.
Higher-than-expected US inflation in May, which rose to 8.6 percent, the highest level since December 1981, threw fear into investors in the stock, bond or cryptocurrency markets. The rise in fuel and food prices did its part, bumping up expectations for Fed action in the coming months decisively. The market even started to wonder if the Fed will raise the fed funds rate not by 50 bps, but by 75 bps at one of its meetings. This morning, Fed rate futures seem to be pricing in the 3.5-3.75% level as the target for this cycle. Meanwhile, not long ago it was pricing in around 3 percent. Thus, one can see a definite increase in expectations for faster monetary tightening.
These expectations, along with the sucking of money through the real economy, in which market jargon can be used to say that the greatest bull market in decades is in full swing. The increase in real product prices that follows can suck capital out of non-tangible products and financial markets as intangible goods. In attempting to summarize recent events, one might look to the US bond market and the US dollar. The U.S. dollar again seems to be the most expensive in 20 years, and yields on 2 and 10-year bonds are starting to exceed the levels of 3%. The increased attractiveness of the interest rates on safe bonds, in turn, may cause investors to no longer to want to own so many risky assets.
In the last week alone, the S&P 500 index fell by more than 6 percent, while on the cryptocurrency market bitcoin fell by 8.5 percent and ETH by 10 percent. The fact that this Wednesday we will learn the Fed's decision on interest rates along with macroeconomic projections of FOMC members adds to the excitement. For now, the market consensus is for at least two hikes of half a percentage point each occurring at the next two Fed meetings. It's fair to say that it's been a long time since a decision from the US central bank was as eagerly awaited by the market as it is now, especially as CPI inflation hit a record high but core inflation retreated for another month in a row.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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