In today’s Money Weekend…Fed turns hawkish…dollar up, gold down…US dollar spikes from buy zone…commodities about to correct…third time unlucky for copper…and more…
The big news of the week was of course the US FOMC meeting, where the holy dot plots did the unthinkable. They moved.
Expectations are now for two rate hikes in 2023 and seven FOMC members see a rate hike coming in 2022, which is three times higher than the last meeting.
When you think about it, nothing actually happened.
The Fed will keep rates at the same level and will continue to buy bonds with the same amount of printed money.
But the shift in guesses by a small bunch of people about what might happen in a couple of years was enough to have the machines whirring into action, shoving markets all over the place.
In the previous week we saw US 10-year bonds stage an impressive rally (on the back of a short squeeze), with yields dropping sharply from 1.55% to 1.45%.
I was personally scratching my head at the sharp fall in yields after the recent inflation numbers showed short-term inflation running extremely hot.
I know the Fed is determined to make everyone believe the high numbers are transitory, but when the last three months’ CPI numbers have an annualised rate of 8%, it is a brave person that thinks buying US government bonds for 10 years at a rate of 1.5% is a bargain.
Of course, inflation won’t stay at 8%. That goes without saying. But pricing pressures are mounting and the chances that a 1.5% return for 10 years doesn’t lose a large proportion of capital is declining by the day.
Dollar up, gold down
After the meeting, US bonds initially sold off, the US dollar spiked, and gold got hammered.
The knee-jerk reaction to FOMC meetings is sometimes reversed over a few trading sessions and then trading carries on as if nothing happened.
The spike in the US dollar, and freefall in gold and other commodities, continued on Thursday but US bonds had a huge rally, negating the fall that occurred on the day after the meeting.
That is quite amazing to me, and if the rally in US bonds continues, it will be sending a strong signal that even the slightest hint of rising rates is enough to kneecap an economy addicted to stimulus.
I will reserve my judgment on what US bonds may do. My trading model needs to see a monthly close on the 10-year yield below 1.39% before I can consider becoming bullish on US 10-year bonds again.
The yield closed at 1.52% on Thursday.
I have started putting together a weekly ‘Closing Bell’ video for you which you can find below. I spend a few minutes taking you through the most important market moves of the week and point out what you should keep your eyes on going forward.
Over the last couple of weeks, I have been pointing out the possibility that the US dollar could spike higher in a short squeeze as long as the 88.00–89.00 level held in the US Dollar Index.
It looks like the FOMC meeting has been the catalyst to spark that short squeeze and it could have further to run before the selling returns.
US Dollar spikes from buy zone
My trading model expects mean reversion to occur more often than not, and that could lead to a rally in the US Dollar Index towards the point of control of the current trading range at 96.00. That is a long way from the current price of 91.87.
Commodities about to correct
Commodities have reacted to the large spike in the US dollar and many of them had a bad session on Thursday. Based on the possibility that the US dollar is heading back to 96.00, the correction in commodities may be just beginning.
Copper has confirmed a false break of the all-time high set in 2011, and if the past two major false breaks are anything to go by, there should be further downside coming.
Third time unlucky for copper
Many other commodities are in similarly precarious positions after an incredibly strong rally over the previous year. A healthy correction looks close by.
I’ll go into more detail about the moves we have seen in markets after the FOMC meeting in the ‘Closing Bell’ video below.
I’ll have a look at the sharp move in the gold price and explain why I think catching the falling dagger is not a good idea at this point.
For Money Weekend
PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here