Fed React: Inflation commitment remains/ likely appropriate to slow increases, Stocks rally, Oil higher post EIA data/Fed/Iran nuclear deal stalemate, Gold shines, Bitcoin enjoys risk rally

US stocks extended gains after the Fed signaled that it will likely be appropriate to slow rate increases at some point. Now that traders see light at the end of the Fed tightening tunnel, the Nasdaq is starting to look like the cleanest dirty shirt in what looks like a 2023 recession bound economy.

The Fed reiterated the commitment to fighting inflation and delivered a fourth consecutive rate increase. Improving earnings and assessments of the US consumer has provided some support here for stocks, but choppy conditions will persist as inflation risks remain elevated. 

Fed

The Fed raised rates by three-quarters of a percentage point as the commitment to cool inflation remains their primary focus. The Fed statement said they are still ‘highly attentive’ to inflation risks and that ongoing increases will be appropriate.   

Fed Chair Powell reiterated his commitment to fight inflation.  After being burned on his call for transitory inflation, Powell will likely continue to try to avoid giving any hints on when they could pause.

Powell would not rule out a 75-basis point rate increase for the next meeting, but he did say that it will likely be appropriate to slow rate increases at some point.  It seems traders aren’t thinking another large move will be justified in September.   

A clear greenlight to buy up risky assets won’t happen until we see evidence inflation is coming down.  Inflation risks will remain elevated as energy shortages are likely, supply chain issues won’t ease given a weakening global outlook, and as pandemic-related issues remain troubling.    Big Earnings

It is starting to look like a tale of two earnings seasons. Some companies are delivering profit warnings and signaling a weaker consumer, while others are posting robust results and highlighting easing concerns about softer demand.  Walmart’s profit warning spooked investors, but the last 24 hours saw a wrath of optimistic outlooks from Microsoft, Alphabet, Hilton, Visa, and Chipotle.  Corporate America might not be as pessimistic about the economy, but Wall Street remains  

Microsoft

Microsoft got away with a soft fourth quarter earnings as they delivered a solid outlook for the new year. The tech giant expects full-year 2023 operating income up double digits and for 11,000 new hires to start working next quarter. So much of Microsoft’s outlook does not paint a picture of a weakening economy. 

Alphabet

A decent earnings report helped overcome a troubled global macro outlook.  Ad revenues came in better-than-expected, but a quickly weakening consumer will remain a big concern.  Boeing Headline misses, but better-than-expected cash flow numbers were positive for shares.  Getting the 787 back into production and for the 737 Max certified for China.   Meta later today. Wall Street is hoping for Meta to be a value play here as it struggles to hold onto the title of being a mega-cap tech stock.  

Oil

Crude prices rallied after US inventories posted a larger-than-expected draw and on dwindling expectations for a revival of the Iran nuclear deal. Oil would have rallied more if expectations weren’t so high for Saudi Arabia to raise September prices to Asian buyers. Any risk of demand destruction will prevent oil from mustering up a major rally.  Oil looks like it is heading for back-to-back monthly price declines.

White House Middle East coordinator Brett McGurk reportedly said it’s “highly unlikely” that the 2015 nuclear deal with Iran will be revived in the near future. 

The oil inventory report mostly confirmed how tight the oil market is and will likely remain.  US production rallied above the 12 million bpd level, but that was offset by record crude exports and improving gasoline demand. US production rose 200k bpd to 12.1 million bpd, which is the highest level since April 2020. 

Oil held onto earlier gains after the FOMC statement highlighted a weakening economy as spending and production have softened.  It looks like the Fed is locked into delivering more rate hikes and that will continue to weigh on economic activity and lead to softer crude demand going forward. 

Gold

Today was a big day for gold.  This FOMC decision should help convince much of Wall Street that a peak in Treasury yields (10-year) is in place.  The Fed remains committed to fighting inflation and the market is getting very close to pricing in peak tightening.

Gold looks like it could continue to stabilize now that Wall Street is starting to become convinced that we might only need to see three more FOMC rate hikes before they are done.  Until inflation shows further signs of easing, gold will struggle to deliver a major breakout higher. 

Bitcoin

It has been over a week since my call that ‘crypto winter’ could be over, and the criticism is starting to ease.  With a good part of Wall Street still expecting a retest of the June stock market lows, it seems difficult to envision a different fate for crypto, but that could be possible. 

Given the outperformance by the tech stocks, it should not come as a surprise that crypto has been stabilizing.  The crypto trade could be evolving here as a peak in yields seems like it is in place. The news cycle has not really been positive for crypto markets (Thank you Coinbase and growing risk a harsher regulation), but if prices can continue to hover above the USD 20,000 level, that might be enough to dissuade the sellers.   

The FOMC decision provided optimism that the end of tightening is in sight and that triggered a nice rally for risky assets that helped elevate cryptos.  

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