We’re here, finally

Markets expecting 75bp hike

After what seems like an interminable wait, we are finally at FOMC day, and the last one I shall be covering as the voice of reason in this missive. Markets have baked another 75 basis points into their loaves of bread, but it’s going to be all about what the Fed and Jerome Powell say and not what they do. The IMF downgraded world growth forecasts last night, and there are plenty of recessionary signs around the world. What we’re not yet seeing, is easing commodity prices and supply chain pressures flowing through to lower prices.

Markets will be betting heavily that the Federal Reserve may mollify some of its inflationary language. These were the same markets that just recently were pricing in 100 basis points today in a panicked manner, so don’t take their “wisdom” as gospel. Although the Fed may well be pleased that some of their harsh medicine is taking effect by virtue of voice and intent rather than action, it wouldn’t make much sense for them to take their foot off the brakes right now and pivot to being dovishly hawkish. The Fed already has a credibility issue thanks to being so vehemently in Team Transitory, and although my expectations for them are nearly as low as the Reserve Bank of New Zealand, monetary custodial of my beloved but now thoroughly messed up country, I expect them to “stay on message.”

As such, some complacency may be shaken out of the US bond market this evening, and the US dollar’s downward correction may base, while the FOMO gnomes of Wall Street may have a tough day. Or I could be completely wrong, please circle back to the “wisdom” comment above. Either way, the big loser will probably be the White House as November’s mid-terms loom closer, and the tears flow harder.

Wall Street fell overnight as it continued absorbing the Walmart earnings shocker, but US index futures are bouncing quite impressively in Asia after the Alphabet and Microsoft results. Both tech giants just missed on earnings, but both maintained very upbeat outlooks; that was enough for the FOMO gnomes. Meta announces after the close of trading overnight, and if we are looking for an online ads selloff, Meta’s results may be that catalyst. If you’re wondering why, go and look at your Facebook and Instagram feeds, which have become a wasteland of actual content from your “community” but a dumping ground for pointless adverts. They look more desperate than Joe Biden at the moment.

Interestingly with US earnings, McDonalds, Coca Cola and Chipotle all produced decent results. That circles back to this year’s winners being companies making things that people need no matter what the economic climate is, while companies that rely on the discretionary consumer wallet may find the going tough. Eating and drinking is one of those necessities, although I am not advocating that readers should consume a diet of fizzy drinks, burgers, and Mexican food. For Asia’s part, South Korea’s SK Hynix and LG Display announce results today, and it will be interesting to see if the pandemic boom demand for electronic goodies is finally tailing off.

In Asia, Australian Inflation has just been released. YoY Q2 Inflation rose to 6.10% from 5.10%, but slightly less than the 6.20% forecast. MoM Inflation was slightly lower than forecast at 1.80% as well. Australia remains the lucky country, even on inflation, it seems. The slightly softer results have seen RBA hiking expectations pared, sending the Australian dollar lower for now, while I expect local equity markets did not react.

China Industrial Profits has also just been released, climbing by 0.80% in June YoY, a vast improvement on May’s -6.50%. An easing of lockdowns in China likely accounted for most of the boost, and as readers will know, I continue to believe that China’s covid-zero policy remains a key risk for domestic markets, with a likely spill over into regional ones in the event of extended lockdowns. Its impact appears to be muted today.

Ahead of the FOMC tonight, the US releases Durable Goods and Existing Home Sales. Both have downside risk, especially existing home sales after yesterday’s new home sales produced a very soft number. That data will probably only be a driver for intraday volatility, though, as we await the pronouncements of Powell and the FOMC.

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