The market wanted assurance that the ‘Fed put’ was close by, but what we’ve seen was Jay Powell almost welcoming the tightening of financial conditions. Jay Powell acknowledged the drawdown in equity markets was a function of policy and was to be expected - for those wanting to know how far off the Fed are from backtracking and pivoting to a less hawkish stance - well, that will be determined by the economic data, but clearly, Powell is concerned they are well behind the curve, and they really are.
My view was that Gold was a great hedge against a policy mistake (by the Fed) – that policy mistake was one where the Fed is forced to backtrack and reprice market expectations against such aggressive rate hikes over the next 12-24 months. That may still be the case, so I cannot give up on the longer-term bullish Gold view, and the flattening of the US yield is a major red flag, but that's a story for another time.
The policy mistake we’re seeing play out is one where the Fed has allowed inflation to run too hot for too long and are now having to go hard to smash the breaks – this is good for those wanting to buy the USD and short Treasuries and as a by-product, it is not good for Gold, at least for now.
As we’ve seen in a rather ugly trading session in Asia today – the Fed’s view of financial conditions is not good for equity either, as it hits home the idea that we don’t fight the Fed – and right now the Fed sees value in lower equity, wider credit, and higher bond yields – it helps lower inflation to the desired levels. So, shorts have a green light to keep selling equity and USD bulls have been re-invigorated.
I know a lot of what we heard was discussed in recent Fed communication, but there was a tone in Powell’s voice that was new, one of greater concern on inflation and he made a point that this time was different from prior periods of tightening. There was an urgency to get the balance sheet lower too.
Daily of EURUSD
The question for now is whether bad news (such as economic data points) becomes good news for risky assets (such as equities), as the Fed will find it harder to hike 5 times in 2022 if the data is rolling over and the yield curve is flattening – does good data, therefore, especially anything that boosts inflation expectations, become bad news for markets? Feels like that could be the case. Till then I feel the USD goes higher and equities may find sellers on rallies.