Yields surge as Fed begins 2-day policy meeting, Riksbank sets the tone, Mixed housing data, dollar higher, Nasdaq embraces crypto

US stocks are weakening as Wall Street expects the Fed to remain aggressive with their fight against inflation and as Ford reminds us supply chain issues are still troubling. ​ ​

Yields are surging as the inflation-fighting Fed is expected to remain relentless with the tightening of policy, which is raising the risk of a severe recession. ​ The Fed begins its two-day policy meeting and while a 75-basis-point expectation is widely expected, the key messaging by Fed Chair Powell might be that rates will stay elevated for much longer than what the market is expecting. ​ Powell wants this tightening cycle to remain powerful with the fight against inflation and he would want to see those rate cut bets get pushed out much further.

Riksbank joins 1% club

The Swedish central bank stunned FX markets with a 1 percentage point hike to 1.75%. The Riksbank reiterated that inflation is too high and that they will continue to be raising rates in the coming six months. This hike was the largest one since Sweden’s inflation-targeting regime was created in 1993.

The Riksbank is setting the tone for this week and expectations should grow for more central banks should err on the side of being more aggressive in fighting inflation.

US Data

The mixed August readings for housing starts and building permits still confirm the cooling of the housing market. ​ Housing starts unexpectedly jumped higher, while permits plunged. ​ Single-family permits are heading lower and that trend will likely continue given the weakening consumer and surge in rates. ​

FX/Treasuries

The short-end of the Treasury curve is skyrocketing as traders anticipate the 2-year Treasury yields to move above the 4% level. The last time the 2-year Treasury yield traded above the 4.00% level was in 2007 and right now it seems it will be only a matter of time before it continues with its ascent. The consensus view on Wall Street is for the Fed to take rates to 4.25%, but some still think that they may be done at 4.00%. ​ ​

King dollar has been the primary beneficiary of the move in Treasury yields, but its recent gains are not matching the moves in fixed income. ​ It appears that bullish bets on the greenback are waning and that could continue if the FOMC decision and updated forecasts signal the inevitable economic slowdown is quickly coming.

Crypto

Bitcoin is lower as risk aversion runs wild as rates continue to surge. The news is not all bearish today as the Nasdaq is poised to get involved with crypto. ​ The Nasdaq is expected to launch a new Digital Assets unit that will offer crypto custody and help expand other services. The Nasdaq is not expected to launch a crypto exchange but this is a massive commitment to the cryptoverse.

Bitcoin’s fate will be determined by this week’s central bank decision fireworks, which could help fuel any selloffs to retest the summer lows. ​ Peak pessimism is almost here for crypto, which is needed before longer-term money piles back in. ​

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