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Sacrificing Growth to Tame Inflation | Morning Express 9/22/2022

Posted: Sept. 22, 2022, 9:14 a.m.

E-mini S&P (December) / NQ (December)

S&P, yesterday’s close: Settled at 3806.25, down 66.50

NQ, yesterday’s close: Settled at 11,710.00, down 212.25

Fundamentals: The Federal Reserve hiked rates by the expected 75bps, yesterday afternoon. If it was already discounted, why did risk-assets crumble into the close? The initial whipsaw lower was due to the committee’s economic expectations. They forecast a yearend Fed Funds Rate of 4.4%, up for on 3.4% in June, implying another 140bps worth of hikes could be in the cards, while lowering their growth forecast for 2022 to +0.2%, down from +1.7% in June. In fact, one member sees the economy shrinking this year. Ultimately, this strongly reiterates the Fed’s priority, to bring down inflation at all costs. The current CME FedWatch Tool has 125 bps through yearend at a 65.2% probability and 150bps at 3.4%, meaning the extra 25bps had not been discounted. As we moved into Fed Chair Powell’s press conference, risk-assets rebounded sharply. The S&P traded from a low of 3832.75 to a new session high of 3925.25, pinging a critical level of major three-star resistance. Although this was not Jackson Hole-Powell, and it rightfully wouldn’t be given the post FOMC meeting stage, he strived to hold his hawkish line. When answering the opening question, he said he will give a direct answer but first reminded the audience ‘the Fed will keep at it (hikes) until the job is done’. Throughout the press conference and Q&A, the market was on its toes waiting for a less hawkish or dovish slip from the Chair, but it never came. The largest takeaway may have been Powell saying, “the current rate is the very low end of the restrictive range.”

At the same time, it is arguable the Federal Reserve is still not being realistic enough to actually tame inflation. Shocking the market, per our discussion in yesterday’s Morning Express titled, 100bps: Shock and Awe, is necessary because given inflation is levitating in September, staying in line with expectations has not worked. By the end of 2023, the committee sees Unemployment Rate merely rising to 4.4%, with inflation cooling to 2.8%. We do not really disagree with this opinion, but for the policymaker to hold the opinion in and of itself can stoke inflation because it implies the forward-looking expectation of becoming less hawkish.

Do not miss our daily Midday Market Minute, from yesterday.

I spoke with our Macro Analyst Jannis Meindl, who authors our Top Things to Watch this Week and can be found on our weekly Macro Corner podcast. He made a great point in saying the Fed is relying on the yield curve to do the talking. An inverted yield curve is a precursor to a recession. Yesterday, the 2s10s curve continued to invert and decisively broke below the historic -0.50bps floor, hitting -0.558% overnight and marking the worst inversion ever. However, it is important to note the 10-year still holds a premium of 25bps over the 3-month yield and though this fell 2% since its May peak, it has held a low of +0.119%. Still, we both agree that relying on the yield curve to do the talking creates a murky narrative, either signal steadfast vigilance until inflation has been tamed or risk getting trampled.

The volatility continues today after the Bank of Japan intervened to prop up the Yen for the first time since 1998. The bank did not make the maneuver at their policy announcement, but shortly after when the Yen continued to weaken. A rebound in the Yen has broadly deteriorated the U.S. Dollar’s post-FOMC gains against global currencies, helping to stabilize the risk-landscape ahead of the U.S. opening bell.

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NQ (December)

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Crude Oil (November)

Yesterday’s close: Settled at 82.94, down 1.00

Fundamentals: Crude Oil weathered much of the broad volatilities very well and did not set a new low on the week. Stoking a rebound are comments coming out of Russia this morning. It began with Russian official Medvedev saying the country is ready to defend its territories by all means, including nuclear. Into the onset of U.S. hours, reports that Russian production could fall to 490 million tonnes in 2023 brought added tailwinds. In 2021, Russia produced 534 tonnes with production falling to 450-475 million tonnes this year. However, there was a belief it could rebound next year. A weaker U.S. Dollar from the overnight highs is also seen as buoying Crude Oil from its big level of support.

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Gold (December) / Silver (December)

Gold, yesterday’s close:   Settled at 1675.7, up 4.6

Silver, yesterday’s closeSettled at 19.48, up 0.297

Fundamentals: Of all assets to enjoy an engineered rebound of the Japanese Yen, it is Gold and thus Silver at the forefront. Historically, Gold priced in U.S. Dollars tracks very closely to the Yen due to the currency and rate dynamics. There is also no doubt the bludgeoning the Yen has incurred this year has weighed on Gold. Will this reversal in the Yen hold? In other news, the Fed held a more hawkish line due to their rate hike expectations through yearend, per our discussion in the S&P/NQ section, and this has certainly weighed on the precious metals complex. There is a clear push and pull setting up to close out the week.

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Silver (December)

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