- Dollar index rises to best levels since April 10th (euro falls to one-month low)
- Rising inflation expectations keeps future Fed rate hike risks in play
- Consumer sentiment tumbled 9% as recession worries persist
US stocks are softer as banking jitters persist and after a steady dose of reminders of all the risks that remain on the table; Treasury Secretary Yellen reiterated that a default would be “an economic and financial catastrophe.”, while Fed’s Bowman warned that they will likely need to raise interest rates further and hold them higher for some time if inflation remains high.
Today’s US economic data also reminded investors that stagflation risks aren’t going away anytime soon. The University of Michigan sentiment survey showed that long-term inflation expectations jumped to a 12-year high at 3.2%. In addition to deteriorating sentiment and current conditions, expectations plunged to the lowest levels since July. The consumer is becoming rather grim and if inflation expectations continue to remain elevated, that could force the Fed to tighten more.
Given all the resilience from the US economy that we’ve seen so far, it is hard to argue that we are seeing enough weakness in the service sector to justify any chance that inflation will fall to 3.0% anytime soon. Unless the credit crunch gets much worse or the Fed ends up having to deliver more rate hikes, we might see the disinflation process struggle over the next few months.
FX
There are a lot of short-term risks for the economy and that has helped the dollar have its best week in a couple of months. If Europe could get done with their last couple rate hikes, the dollar might need to dust off that crown again. King dollar isn’t back, but sustained weakness seems unlikely now.
Fed
Fed’s Bowman reminded Wall Street that the Fed is data-dependent and that the next move could still be a rate hike. Bowman said, “Should inflation remain high and the labor market remain tight, additional monetary policy tightening will likely be appropriate to attain a sufficiently restrictive stance of monetary policy to lower inflation over time.”
Bowman, a centrist, might not really believe that a rate hike is needed just yet, but her comments are justified in pushing against all the rate cuts that are getting priced.
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With more than 20 years’ trading experience, Ed Moya is a senior market analyst with OANDA, producing up-to-the-minute intermarket analysis, coverage of geopolitical events, central bank policies and market reaction to corporate news. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies.
Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news.
Based in New York, Ed is a regular guest on several major financial television networks including CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business and Sky TV. His views are trusted by the world’s most renowned global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Breitbart, The New York Times and The Wall Street Journal.
Ed holds a BA in Economics from Rutgers University.
