Daily Wrap Up 26 August 2022

26 Aug 2022 04:25 PM

Stock slumps post Powell, U-tun for USD

There was a burst of volatility when Jerome Powell delivered his speech and initially the US equites tumbled, and the US dollar rallied. With a few minutes, the markets swung in the opposite direction.  On the run up to today’s speech, traders were divided over what size rate hike will the Fed announce next month, will they hike by 75-basis points for a third time in a row, or will they scale back their policy and only lift by 50-basis points. Just before the Powell made his update, the Fed funds futures were factoring in a 46.5% chance of another 75-basis points rise next month, and now the futures are pencilling in a 56.5% chance of a 0.75% rate increase. The scales have been tilted slightly towards a bigger lift, but by no means is it a done deal, after all, there is clearly still deep division as to the Fed’s next move. Mr Powell warned there will be some pain on the horizon as the US central bank will plough ahead with its plans to bring down inflation, and dealers took that as a sign the more rates hikes are on the agenda, even if it hurts the economy. The S&P 500 is now trading in the region of 4110, down 2% on the day. 

The US dollar index was already under selling pressure as the core PCE reading came in at 4.6%, narrowly below the 4.7% forecast, and it was a drop from the previous report of 4.8%. The dip could be a sign that inflationary pressure is easing. Also, Raphael Bostic, Fed member, announced he is leaning towards a 0.5% hike in September. The greenback has manged to swing back into positive territory, just about.

Gold has gone from bad to worse, the metal was already lower this afternoon and the aggressive U-turn in the US dollar has pushed the metal further into the red. It is now down 1%. The possibility of more large rate hikes makes gold less attractive as it does not pay a coupon like bonds, or ofer interest like saving accounts.

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