Back to school, ECB signals more hikes to come, Powell sticks to hawkish script, Bitcoin hovers around $19k

Parents are rejoicing back to school time and Wall Street is embracing the consistency in the Fed’s messaging that they will keep at it until the job is done with inflation. Stocks are rising after Fed Chair Powell stuck to his hawkish script and affirmed the commitment to tighten policy until inflation is back towards its target. Wall Street is expecting to see some pricing pressure relief with next week’s inflation report, but that shouldn’t derail the current 75 basis-point pace of tightening.

ECB delivers 75bp hike

The ECB policy meeting went as expected. Policymakers delivered a historic 75 basis-point rate increase and signaled that more hikes are coming over the next several meetings. The updated forecasts reminded traders that these forecasts should be written in pencil. ​ Inflation outlooks were boosted and growth forecasts were slashed, but didn’t project a recession. ​ ECB President Lagarde did acknowledge a recession is part of the downside scenario. Given the uncertainty with inflation, Lagarde was hesitant to give any clues on what the terminal rate might be for the ECB. ​ Money markets are telling us that even as the eurozone is headed towards a recession the ECB will be raising rates over the next few meetings. ​

US Data

US weekly jobless claims continue to edge lower as the labor market remains very strong. ​ Initial jobless claims declined to 222,000 for the week ending September 3^rd. ​ Wages will remain elevated and that should support the Fed’s mission to tighten aggressively.

Oil

It looks like crude prices are fighting for their life. ​ The crude demand destruction-driven oil price collapse might have found a floor. ​ Energy traders have mostly priced in the Chinese COVID shutdowns and demand concerns from aggressive tightening signals by the ECB and Fed.

Gold

Gold prices are declining as the era of negative interest rates is behind us. Non-interest bearing gold will struggle as the ECB and Denmark end subzero interest rates. ​ Gold seems poised to consolidate at the $1700 level until we get to next week’s US inflation report.

Cryptos

Fed Chair Powell’s talk on monetary policy at the CATO Institute also included an update on central bank digital currencies. ​ Powell reiterated the Fed does not want to stand in the way of innovation, but regulation is needed. It is clear that a digital dollar by the Fed would be hard for them to make. ​ The evaluation process with CBDC will take a lot more time as the Fed is struggling to ensure privacy protection and avoid market chaos as funds transfer to a CBDC. ​ Powell also focused on the need for a regulatory framework to control stablecoins.

Bitcoin is giving back some of yesterday’s gains as risky assets declined following a double dose of hawkishness from Fed Chair Powell and ECB president Lagarde. ​ Bitcoin is trying to stabilize above the $19,000 level but that will be hard given consistent messaging about taking rates above the terminal rate needed by the major central banks.

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