The U.S. Stock market is retreating after Federal Reserve (Fed) Chairman Jerome Powell confirmed that monetary policymakers will not allow inflation to take over the American economy and that means that Powell is ready to sacrifice economic development to bring inflation down at any cost.
“The risk is that because of the multiplicity of shocks you start to transition to a higher inflation regime. Our job is literally to prevent that from happening, and we will prevent that from happening,” Fed’s chief said.
This sounds like a speech of a doomed man that has accepted his fate. “Is there a risk that would go too far? Certainly, there’s a risk. I wouldn’t agree that it’s the biggest risk to the economy. The bigger mistake to make ... would be to fail to restore price stability,” Powell resumed. So, the Fed has finally formed a conviction that the economy is the worthy victim to bring inflation down. This is quite different from what Powell was saying before. His last speech at the European Central Bank (ECB) forum sounded like prosecution. The Fed is no longer an advocate or a judge to which one could appeal in the hope of finding some justice and a fair verdict in the case that economic conditions worsen and the stock market deteriorates further. Now it has become a prosecutor and executioner all in one.
Macroeconomic data is no longer sufficient to provide an economic picture on which we could pass judgement on possible changes to the monetary policy of the Fed and other central banks. It now simply has a minor significance, at least for the Fed, until control over inflation is restored or until the American economy suffers extraordinary damages.
It is worth to note that the U.S. debt market disagrees with Mr. Powell as U.S. 10-year Treasuries yields dropped below 3.0%, while yields of the short-term debt remains high. This may indicate that investors are suggesting that the Fed could be forced to stop its monetary tightening sometime in the autumn, or even turn to monetary easing again. However, both the Fed and investors could be wrong, and we may expect the stock market to be knocked out this autumn.
The S&P 500 broad market index is a step just before slipping into an aggressive downside pattern with targets at 3450-3550 points. In order to do so the index has to close this week below 3770 points, and it is very close to it.
The most interesting story can currently be found in the oil market. There in not much time left for crude prices to lift-off to the extreme targets at $160-180 per barrel of Brent crude benchmark. Indeed prices are trying to rise and were hitting $119.4 by the middle of this week, but the following slide erased all the gains. The outcome of the Organisation of the Petroleum Exporting Countries and allies (OPEC+) meeting was no surprise as delegates confirmed another increase in oil production by the same well-known and agreed 400,000 bpd. What is more interesting is plans for the future beyond August as in the next month crude production of OPEC+ is expected to reach prepandemic levels of 2020. The market has received no answers so far as to the exact plans, but this is no reason for crude prices to neither continue up nor to slide down. So, a minor long position initiated at $112.70 per Brent barrel is intact.
Gold prices continued to move to the downside and dived to $1790 per troy ounce. It is very close to the $1730-1750 target area. So, it may be a good time to prepare to take profit of short trades at $1750-1760 per ounce.
EURUSD is seen to be pointing at a negative area of 1.01500-1.02500 by the beginning of August. The most important support level on the way to reach these targets is located at 1.04300. If this level is crossed down this week it will be interesting to consider short positions next week.
GBPUSD is going down within a downside formation with targets at 1.19500-1.20500. If the pair close this week below 1.21300 it may continue down aggressively, and some short trades could be considered.