Fed Flushes Dollar Down the Drain, ECB and BoE Next

• Fed chief strikes neutral tone, markets take it as ‘green light’ to party
• ECB and BoE decisions coming up, both set for 50bps rate increases
• Earnings season goes into full force with Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Google (NASDAQ:GOOGL)

As expected, the Federal Reserve raised interest rates by one quarter of a percent yesterday and flagged further tightening to come. During his press conference, Chairman Powell struck a relatively neutral tone, highlighting the recent progress in the inflation battle but also stressing that the Fed does not anticipate cutting rates this year.

The underlying theme was one of optimism as the Fed chief entertained the possibility of a soft economic landing, where inflation gets squashed without a serious recession. He added that a “disinflationary” impulse had started to emerge, before balancing that with the caveat that it is too early to declare victory and that he expects another “couple” of rate hikes.

What really caught the market’s attention though, was his reluctance to push back against loosening financial conditions. He had multiple opportunities to express concern about how much financial conditions have loosened lately, but decided not to. That was a signal that investors were not ‘fighting the Fed’, giving them the green light to load up on riskier assets and flush the dollar down the drain.

Stock markets and gold prices enjoyed another sensational rally as Treasury yields came crashing down, decimating the dollar in the process.

ECB and BoE in the spotlight

Euro/dollar hit fresh highs around the $1.10 region once the Fed dust settled, ahead of the European Central Bank’s own decision later today. The ECB is widely expected to raise rates by 50bps, after President Lagarde essentially pre-committed to that at the previous meeting.

The question for the euro is whether she will also telegraph another 50bps move for March, which seems likely considering that inflation continues to rage while the outlook for economic growth has brightened a little lately with the collapse in gas prices.

It will be a trickier affair for the Bank of England, which has to strike a balance between reining in double-digit inflation while business surveys point to a rapidly deteriorating economy. Markets have almost fully priced in a 50bps rate hike, but the decision might contain a dovish twist if the vote is heavily split or the updated forecasts continue to point to a recession this year.

As for sterling, it's tough to be optimistic. The BoE has been dragging its feet throughout this tightening cycle, the UK economy is stumbling from crisis to crisis with the latest one being widespread strikes, and the pound’s links to global risk sentiment leave it vulnerable to a selloff if the recent euphoria in equity markets fades.

Earnings season kicks into top gear

There’s also a heavy barrage of earnings releases from Wall Street’s tech titans today. Apple, Amazon, and Google will all report after the market close and their results can send shockwaves throughout the entire market given their collective weight in indices such as the S&P 500.

Meta Platforms got the ball rolling in the right direction yesterday after it axed its planned capital expenditures and announced a massive $40bn share buyback program, propelling its stock higher by 20% in after-hours trading.

Overall, there’s a lot of optimism in the markets, which is not necessarily grounded in reality. Behind the latest rally in the S&P 500 lies a massive multiple expansion that has seen the index trade above 18 times forward earnings, even as leading indicators point to a slowing economy and earnings growth has turned negative.

The ‘tell’ that this rally is built on shaky foundations is the leadership - the best performing stocks this year are the lowest quality names, most of which were smashed into oblivion last year because they are cash-burning machines.