On the ropes

Equity markets are tumbling again on Wednesday as the latest batch of inflation data delivered another heavy blow to sentiment.

Every month investors eagerly await the CPI report for any sign that the inflation problem is easing and they are almost always left deflated by the data. Today feels like one of the biggest blows yet and given how aggressive the Fed is already being and the increase in recession talk in recent weeks, it’s a tough one to recover from.

It may not prove to be the knockout punch but investors are on the ropes and risk assets are now vulnerable to further declines ahead of the Fed meeting. How much more will it take before the towel is thrown in and recession becomes the base case? I don’t think we’re far away.

The US is more resilient than most but there’s only so much it can take. A 75 basis point hike is now fully priced in this month, with an outside chance of 100, while another 75 is then priced in for September. The Fed has a lot of work to do to get to grips with inflation and a hard landing is looking increasingly likely to be the price to pay for it.

The data gave EUR/USD enough of a push to breach parity briefly today although it has since pulled back, highlighting once again how big a psychological level it is. It looks only a matter of time though given the risk aversion in the markets and the path of travel US interest rates are on.

Beaten to the punch

The BoC beat the Fed to the punch in raising interest rates by a full percentage point, doing so following today’s meeting while admitting it underestimated inflation since the spring of last year. The central bank reaffirmed its commitment to price stability, warning of more rate hikes to come, while considerably increasing its inflation forecasts for this year and next. It continues to believe it will avoid a recession but with a tightening cycle of this magnitude, that will be easier said than done.

Bitcoin’s relationship with inflation is very different than once assumed

Bitcoin is holding up surprisingly well in the aftermath of the US inflation print. Risk assets have been hit hard and cryptos don’t have a great relationship with inflation and rising interest rates. Still, it is below USD 20,000 and remains vulnerable to further bouts of risk aversion, of which there may be many in the run-up to the Fed meeting in a couple of weeks. Challenging times lie ahead.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events

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