This week ends on a strong hawkish note, as investors finally accepted that the Federal Reserve (Fed) and its Chairman, Jerome Powell, delivered a real plan for monetary tightening for the rest of the year.
This understanding came after Powell enforced his hawkish rhetoric by saying that "a strong majority of Committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year." This is a clear signal towards another three interest rate hikes in 2023. In his speech Powell referred to a stronger than expected economic performance and a healthy labour market in America. Indeed, the economy in the United States is seen to be booming as Q1 2023 GDP growth was upgraded to 2.0% QoQ from the first estimate of 1.3%. This might sound insane but the economy is booming amid high inflation and borrowing costs. The reason for this is the strong labour market. Jobless claims released on June 29 went down to 1,742K from 1,761K a week before.
So, now investors have a better understanding of the Fed’s action plan. It is very simple. The monetary watchdog is indeed going to sacrifice the economy, provoke a deflationary shock, and a return to the stimulus measures afterwards. Investors believe in the Fed’s devastating abilities, as consensus over another interest rate hike in July has been established in the market. Strangely, investors do not believe the Fed will go further with the rate hikes in 2023, probably thinking that the devastating effect of the rate hikes will ruin the market by September when the Fed will decide on its further rate actions.
The debt market is confirming this scenario as U.S. 2-year Treasuries’ yields are rising ahead of the 10-year Treasuries yields. This extended yield curve inversion is closely touching the highs of March 2023, when the banking crisis erupted in the American economy.
The Personal Consumer Expenditures (PCE) index for May indicated a significant lowdown to 3.8% YoY vs 4.6% expected. Moreover, April’s index data was revised down to 4.3% from 4.4% previously. PCE index on the monthly basis dropped to 0.1% against the 0.5% expected. The Fed’s favourite Core PCE Index slowed down to 4.6% vs the 4.7% expected. The investment crowd is roaring as these figures confirm the idea of a halt in interest rate hikes after July. Though this optimism is very premature ahead of the U.S. Labour market report for June, it is supporting risky assets now.
Technically, the S&P 500 index continues to have an upside formation with targets at 4250-4350 points, that have already been met. The market has crashed the resistance at 4340-4360 points and burst into a reverse zone. But it would be better to wait for this reversal to be confirmed during next week.
Brent crude prices continue to test the support at $67-69 per barrel. These efforts have failed, however. It is highly likely another attempt would be performed later. Once this level is broken, recession scenario chances will become very high. Its targets are at $40-60 per barrel of Brent crude.
Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. But the situation has changed dramatically as the important support level of $1980-2000 per ounce was smashed. Short positions were opened after prices tested the $1970-1980 former support level with targets at $1890-1910 per ounce. The first half of this trade was closed at $1910 per ounce, while the second half was left open with the stop-loss order moving to $1980 to avoid any losses, and amid expectations of some extra profit.
The currency market became active after Powell’s statements. So, the Greenback has strong chances to continue strengthening. But it is too risky to go long on the Greenback at the moment. It would be better to wait for a decline of the EURUSD below 1.06000 to seek out sell opportunities for the Greenback.