Minutes from the Federal Reserve’s (Fed) latest policy meeting were more hawkish than expected. The minutes revealed that some officials preferred another 25bp hike right away instead of a pause. Almost all of them said that additional hiking would likely be appropriate, and the forecasts showed that they also expect mild recession.
The minutes came to confirm how serious the Fed is in further tightening monetary conditions, and boosted the Fed hike expectations. The US 2-year yield came very close to 5%, the stocks fell, but very slightly. The S&P500 closed the session just 0.20% lower, while Nasdaq 100 gave back only 0.03%. The US dollar gained however, the EURUSD slipped below its 50-DMA, as the Eurozone services PMI fell short of expectations. The June number still hinted at expansion, but the composite PMI slipped into the contraction zone for the first time since January, hinting that activity in Eurozone is slowing because of tightening monetary conditions in the Eurozone as well. On the inflation front, the producer prices fell 1.5% y-o-y in May, the first ever deflation since February 2021. The expectation for the 12-month inflation in EZ fell to 3.9% in May. It’s still twice the ECB’s 2% policy target, but it’s coming down slowly. And the trajectory is certainly more important than the number itself.
Moving forward, further opinion divergence will likely appear along with softening data, but the ECB will continue hiking the rates because officials will be too afraid to stop hiking too early. And as the economic picture worsens, the credit conditions become tighter, the cheap loans dry up and the post-pandemic positivity on peripheral countries fade, we will likely see the yield spread between the core and periphery widen. And the latter could have a negative impact on the single currency’s positive trajectory against the US dollar.
Due today, the ADP report is expected to reveal that the US economy added around 228K new private jobs in June, while the JOLTS is expected to have slipped below 10 mio job openings in May.
US crude clears important resistance
US crude cleared the all-important 50-DMA yesterday. The barrel of US crude trades a touch below the $72bp level this morning. The next important resistance is seen near $73.50, where stands the 100-DMA.
There is a big fight going on between OPEC – who is ready to do anything to push oil prices above $80pb, and the oil bears, who aggressively fight OPEC and sell any price peak that follows an OPEC-led rally. But the persistent production cuts will at some point become a fundamental problem. And the longer the bears fight OPEC and the more OPEC cuts production, the more severe the impact on global oil glut, and the higher the risk of a decent jump in oil prices.
Yet another rally in energy prices would again interfere with the central banks’ fight against inflation and get them to further tighten their policies. And that would apply further pressure on global economy and on asset prices.
A soothing argument is that energy prices cannot rally infinitely when the world is so sensitive to inflation because recession worries will rapidly wane the energy rally and settle the prices at reasonable levels. So even with the most optimistic scenario for oil, there is little chance we see oil prices spike above $90pb. Maybe we could get to the $80bp that will make Saudis happy, though.
