It’s a little hard to know where to start today after a massive risk aversion wave swept markets yesterday, so let’s start where I believe the rot really began, the Bank of England policy decision. The Bank of England raised rates by 0.25% to 1.0% in a split decision (three members wanted 0.50%), which was in line with expectations. It's what they said, and not what they did, that saw Sterling slump by 2.0%. The bombshell was the 2023 growth forecast, which was marked down massively to -0.25% from 1.25% previously.
The BOE basically said there was going to be a recession next year, somewhat at odds with the Federal Reserve’s statements that a soft landing was possible in the US. BOE officials basically said they were going to concentrate on tackling inflation because there wasn’t much, they could do to offset a slowdown. UK consumers would, unfortunately, have to endure rising costs of living and recession headlock that would make Stone Cold Steve Austin proud. It is of little surprise that the BOE doesn't intend to start reducing its GBP875 billion balance sheet yet. The only positive being the BOE will likely hike rates in small increments and let markets themselves do most of the dirty work.
That is somewhat at odds with Fed Chairman Powell’s comments that the Fed would be able to engineer a soft landing for the US economy as it scrambles to get on top of inflation. Given the economics PHD’s were adamant that inflation was “transitory” last year, I’m struggling to fully buy into that, and so it seems, is the street. I argued that hiking rates by 0.50% a meeting while scaling up quickly to sell $95 billion of bonds and MBS’ a month off their balance sheet wasn’t dovish at all. Also, Mr Powell’s comments had left plenty of wiggle room to hike by 0.75% if needed. 0.50% hikes could be as “transitory” as inflation. Markets seemed to come to that realisation, US 110-year yields climbed back through 3.0% and stayed there, and everyone knows about the bonfire in equity markets.
The Reserve Bank of India blinked on inflation this week as well with their unscheduled rate hike. I actually applaud them for this, there’s no shame in effectively admitting you were incorrect and acting decisively to sort the mess out. Even an ECB member said yesterday that a rate hike would be considered at the June meeting. Considering and doing are two different things though, although if EUR/USD is around parity, their thoughts might be focused. However, their rightful get-out-of-jail card is that they are rapidly moving to oversight of a pseudo-wartime economy.
Master fence-sitting vacillators, the Reserve Bank of Australia, though, haven’t made too many friends with their guidance. Hiking rates by 0.25% earlier this week, while still playing the dovishly hawkish card. The RBA Statement of Monetary Policy oday though, told a rather different message and I’m wondering if they were hoping nobody was watching because it’s Friday. It massively raised trimmed mean inflation forecasts to 4.75% by December 2022, and 3.25% by December 2023, with core-inflation remaining above the 2-3% target band until 2024. It said it was appropriate to start normalising interest rates and that further increases would be needed to restrain inflation. Australian equities would have been battered today after the Wall Street slump yesterday anyway but would probably have suffered a similar fate anyway after the RBA SoMP release.
Slowly but surely, the central bank fence-sitters are being dragged into the inflation fight, even if they are fighting dovish rear guard actions. The reality that inflation has returned to the world after 20 years, that the 15 year run of the cost of capital is zero per cent is over, or that we can no longer rely on central banks to reverse flow wealth transfers to homeowners and equity investors and corporate debt Caligula’s via quantitative easing, appears to be dawning on the world. We may well have reached peak globalisation and with China slowing, a process in place pre-covid-zero I might add, and a war in Eastern Europe that will price shock the worlds food and energy value chains, it is little surprise that equity markets might be having second thoughts about valuations, even at these levels.
And still, the week isn’t over, with US Nonfarm Payrolls still to come. Market expectations are for around 400,000 jobs to be added, roughly the same as March, with unemployment edging lower to 3.50%. A sharp divergence, up or down, from the median forecast, should produce a very binary outcome given the schizophrenic nature of the short-term financial markets at the moment. A print north of 500,000 should provoke a faster tightening by the Fed possible recession equals selling equities, bonds, gold, cryptos, DM and EM FX, buy US Dollars reaction. Conversely, a print under 300,000 should see a sigh of relief less Fed tightening rally. Buy equities, bonds, gold, cryptos, DM and EM currencies and sell US Dollars. It's that sort of market.
Thankfully, most of us still have our weekends free, but if one wants to watch the direction of travel for market sentiment, the crypto-space this weekend might be interesting to watch, especially if we get some headline bombs. Bitcoin held support perfectly ahead of support at $37,400.00 on Wednesday, rising 5.20% in the general post FOMC relief rally. Yesterday, it lost around 8.0% and traded as low as $35,600.00, crashing through the triangle support at $37,400.00. Negative developments over the weekend could spur a sell-off to around 32,000.00 settings Monday up for a bad start. If risk sentiment continues plummeting, the chicken bones on the technical charts suggest Bitcoin could be on its way to $28,000.00 and then 20,000.00. HODL on for dear life.