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Higher for longer

Stocks fell sharply after the Federal Reserve raised rates again and signalled that policy will be restrictive for a fair while. It was a pretty darn hawkish statement – the Fed is prepared to buckle up for a hard landing and tame inflation come what may. “We have got to get inflation behind us. I wish there was a painless way to do that. There isn’t,” Powell said. The Fed raised rates by 75bps for a third time in a row and signalled there would be another 1.25 percentage points coming by the end of the year. This was a killer blow to those who thought the Fed is going to pivot. 

After touching a high above 3,900, the S&P 500 ended the day down 1.7% and under the next key level of 3,800. The Dow Jones shipped over 500pts, and the Nasdaq fell 1.8%. Asian markets were broadly lower overnight, and Europe has taken the soft cue to notch broad losses in early trading on Thursday. The FTSE 100 fell 1% to 7,160 area, while the DAX declined almost 2% to the 12,500 area before paring losses. 

Dollar at 20-year high

The dollar gained as US yields picked up sharply at the front end. US 2yr yields rose above 4.1% for the first time since 2007. The dollar index cleared 111 to mark a fresh 20-year high for the greenback. As a result of dollar strength, as well as notable concerns about the state of the UK economy and fiscal policy, sterling fell to a fresh 37-year low against the dollar. GBPUSD fell as low as 1.1210 this morning, breaching yet another level on its way down.  

Bank of England up next

It’s the turn of the Bank of England now. Markets anticipate the MPC will vote to raise rates by 50bps to 2.25%, but there is a strong chance they choose to go bigger, particularly in the wake of the recent moves by the Fed and European Central Bank. The BoE is in an invidious position but it has to take the Fed’s lead and be prepared to inflict pain; compared with persistently high inflation, a short-term recession is the lesser of two evils. Markets are now pricing rates at 5% by September next year and I fail to see how the BoE can stop until inflation regains its anchors. Gradualism is being replaced with a more forceful attitude to tightening monetary policy. It’s important too that the BoE acts with sterling in mind.

Central bank crazy

The Swiss National Bank joined the bandwagon this morning, raising rates by 75bps to take the main policy rate out of negative territory for the first time in years. The Bank of Japan remains headstrong in its unwillingness to conform to the new central bank orthodoxy, electing to leave its ultra-loose monetary policy unchanged even as inflation starts to pick up. After the Swiss move, Japan remains the last major economy with a negative policy rate after it chose to keep it at –0.1%. That left the yen at a fresh multi-year low against the dollar, with USDJPY rising to almost 146 before it plunged back to 142 as the BoJ intervened in the currency market for the first time since the late 1990s. 

Gold sinks

Rising nominal and real rates, as well as the stronger dollar, creates more headwinds for gold. The metal sank to $1,653, again testing the April 2020 lows.  

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