- US inflation jumped 9.1% in June in its biggest yearly increase in 40 years
- 3/4 percent rate increase is becoming likely, with rising expectations for a 1 percent hike
- Yield curve inversion deepens, strengthening recession signal
US Futures and European stocks dropped on rising expectations for even more aggressive tightening after data showed inflation reached a new peak. The Russell 2000 continued to underperform among US futures, as higher borrowing costs impact small firms' business growth the most. However, the Nasdaq 100 futures—also highly susceptible to rising rates—outperformed the S&P 500 futures in pre-market trading.
Today is the second straight day in which such a phenomenon has occurred. Maybe the paradigm is shifting, and bulls are finding bargains in the tech sector after falling 34% between its Nov. all-time high and its Jun. low. However, I can't make such a call before seeing a bottom.
As of now, the peak-and-trough formation is down.
The STOXX 600 index fell as much as 0.5%, extending a decline to its second day for the first time this month.
The pan-European gauge ranges between 400 and 420. However, the risk is to the downside, considering the range top is the previous low, and it's trading within a Falling Channel. Furthermore, if bears will drown out demand from those who remember the 14% jump in a couple of weeks since the Mar 7 low, I expect an accelerated decline.
US inflation soared 9.1% in June compared to a year ago, the sharpest rise since 1981. The higher-than-expected reading fueled bets on a supersized Fed rate hike.
Atlanta Fed President Raphael Bostic said that "everything is in play" regarding the rate increase. Bostic was among the policymakers urging a second 75 basis point increase at the upcoming policy session on Jul 26-27.
Moreover, Bostic's statement may suggest he'd consider going even higher. Perhaps, that is why traders are now pricing a possible 100 basis point hike. The Fed may find such an aggressive move more acceptable after the Bank of Canada announced such a rate hike yesterday, for the first time since 1998.
I can imagine that such an aggressive policy would pressure the European Central Bank to keep up, especially after its currency plunged 19% since its Jan 2021 high, reaching parity for the first time since 2002. I don't think it's the end for the single currency's slide.
On the monthly chart, the EUR/USD completed the second consecutive H&S. The latter, of the Continuation variety, implies a 0.9 target, while the former, a top, points at 0.8. Will the ECB be able to stop floodgates with higher rates?
Even the Japanese yen, a favored haven among institutions in years past, has sunk to its lowest since 1998. The yen could become much weaker too.
The USD/JPY may have completed a bottom spanning since 1990. The trend dates back as far as 1985, when the world's largest economies came together for the Plaza Accord, a global effort to reduce the spiking dollar, destabilizing financial markets. The Accord pushed the Japanese yen in September 1985 from 242 to 153 in 1986. By 1988, the USD/JPY exchange rate was 120. Now, it's 139.
However, what I consider even more noteworthy are bond movements.
The Treasury yield inversion continues to deepen, a leading indicator of a potential recession.
US stocks continued their decline yesterday. The S&P 500, Russell 2000, and Nasdaq 100 fell for the third day, while the Dow Jones sunk on its fourth day.
Gold returned to a decline amid dollar strength ahead of further rate hikes. Technically, the yellow metal stands upon the edge of a knife. Stray but little, and it will fall to the ruin of all gold bulls.
Gold is on the verge of completing a Double Top, with the implied target being the $1,300s. Some may argue that the precious metal has already completed a Triangle, with an implied target is $1,400.
Bitcoin declined after yesterday's rally as the price continues to struggle upon support.
BTC supply and demand is working itself out at the bottom of a potential Rising Flag, bearish after the initial straight plunge. The flag's implied target is a $14,000 drop from the breakout point, confirming a massive H&S top.
Oil gave up yesterday's rally attempt, digging deeper to its lowest since Feb. 25. The price found support by the Mar. and Apr. lows. We expect the price to extend the downtrend, which may take it into the $60s (here is my analysis).
Up Ahead
- Earnings due from JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC)
- US PPI, jobless claims, Thursday
- China GDP, Friday
- US business inventories, industrial production, University of Michigan consumer sentiment, Empire manufacturing, retail sales, Friday
- G-20 finance ministers and central bankers meet in Bali, Friday
- Atlanta Fed President Raphael Bostic speaks Friday
Disclaimer: The author currently does not own any of the securities mentioned in this article.