In today’s Money Weekend… the Fed is getting hawkish… dollar on the rise, gold on the down… the US dollar peaks from the buy zone… commodities are about to correct… unlucky third time for copper… and more…
The big news of the week was of course the meeting of the US FOMC, where holy plots did the unthinkable. They moved.
Expectations are now for two rate hikes in 2023 and seven FOMC members are forecasting a rate hike to come in 2022, which is three times higher than at the last meeting.
When you think about it, nothing really happened.
The Fed will keep rates at the same level and continue to buy bonds with the same amount of money printed.
But the change in the assumptions of a small group of people about what might happen in a few years was enough to make the machines roar, jostling markets everywhere.
Over the past week, we saw US 10-year bonds perform an impressive rally (on the back of a short squeeze), with yields falling sharply from 1.55% to 1.45%.
Personally, I was scratching my head at the sharp drop in yields after recent inflation figures showed short-term inflation to be extremely high.
I know the Fed is determined to make everyone believe the high numbers are transient, but when the CPI numbers for the past three months have an annualized rate of 8%, he’s a brave person thinking of buying. US government bonds for 10 years at a rate of 1.5% is a good deal.
Of course, inflation will not stay at 8%. That goes without saying. But price pressures are mounting and the chances of a 1.5% 10-year return not losing a large chunk of capital are dwindling day by day.
Dollar rising, gold falling
After the meeting, US bonds were first sold, the US dollar rose and gold was hammered.
The knee-jerk reaction to FOMC meetings is sometimes reversed within a few trading sessions, and then trading continues as if nothing happened.
The rise in the US dollar and the free fall in gold and other commodities continued on Thursday, but US bonds saw a huge rally, reversing the drop that occurred the day after the meeting.
That’s pretty amazing to me, and if the rally in US bonds continues, it will send a strong signal that even the slightest hint of a rate hike is enough to topple an economy addicted to stimulus.
I’ll reserve judgment on what US bonds can do. My trading model needs to see a monthly close on the 10-year yield below 1.39% before I can consider turning bullish on US 10-year bonds again.
The yield closed at 1.52% on Thursday.
I have started to prepare a weekly “Closing Bell” video for you which you can find below. I spend a few minutes walking you through the most important market moves of the week and what you need to keep in mind going forward.
Over the past two weeks, I have pointed out the possibility that the US Dollar may soar in a short squeeze as long as the 88.00-89.00 level is held in the US Dollar Index.
It looks like the FOMC meeting was the catalyst to trigger this short squeeze and could have continued before the sell-backs.
The US dollar soars from the buy zone
My trading model expects a mean reversion to occur more often, and this could lead to a rally in the US dollar index towards the control point of the current trading range at 96, 00. That’s a far cry from the current price of 91.87.
Goods about to fix
Commodities reacted to the strong rise in the US dollar and many of them had a bad session on Thursday. Given the possibility of the US dollar returning to 96.00, the commodity correction may only just begin.
Copper has confirmed a false breakout from the all-time high set in 2011, and if the last two major false breakouts are to happen, there should be a further decline ahead.
Unlucky third time for copper
Many other commodities are in equally precarious positions after an incredibly strong rally over the past year. A healthy correction seems near.
I will go into details of the movements we observed in the markets after the FOMC meeting in the “Closing Bell” video below.
I will take a look at the brutal movement in the price of gold and explain why I think catching the falling dagger is not a good idea at this point.
To watch the video, please Click here or the thumbnail below.
For Weekend money
PS: Our Money Morning post is a great place to start your investing journey. We’re talking about the megatrends that drive ASX’s most innovative actions. Know everything here