To The Moon

There's no escaping central banks this week‌[財迷] ‌‌[財迷] ‌‌[財迷] ‌‌[財迷] ‌‌[財迷] ‌‌[財迷] ‌‌[財迷] ‌‌[財迷] ‌‌[財迷] ‌‌[財迷] ‌‌[財迷] ‌‌[財迷] ‌‌[財迷] ‌‌[財迷] ‌‌[財迷] ‌

There's no escaping central banks this week, monetary decisions are plenty. After the Fed yesterday, the Bank of England raised its rates again, and so did the Swiss central bank.

The British central bank raised interest rates by 25 basis points, which is a rather mild increase compared to that of the Fed yesterday, which delivered its biggest hike since 1994. The Swiss National Bank then surprised markets today by raising its rate by half a point.

But that's not all, the Bank of Brazil raised rates overnight for the 11th consecutive time. Yesterday, the European Central Bank held an ad hoc, i.e. emergency, meeting after finding that German and Italian bond yields were going a little too far in the opposite direction. It announced that a new instrument will soon be deployed to avoid too great a disparity in yields.

The days when central bankers competed with each other to be the nicest governor in the financial world are long gone. From now on, the atmosphere is one of forced interest rate hikes, to reduce the amount of money in circulation and respond to the global inflation problem that threatens all economies. But reducing sources of funding means slowing down the economy. As has been said and written all over the place for the past several months, the hundred-billion-dollar question is whether we can keep enough control over the brakes to avoid spinning out, to use a car metaphor. The main driver is Fed head Jerome Powell. It is therefore logical that Fed meetings, like the one that took place yesterday, are major markers for the economy in general and financial markets in particular.

On 15th June, the US central bank announced a massive 75 basis point rate hike. This means that the main access to money now costs 1.5 to 1.75%, compared to 0.75% to 1% previously and 0 to 0.25% from early 2020 to early 2022. This is what the market had been expecting for a few days, so it was not surprised. Initially, investors were expecting a monetary tightening of 50 basis points, but the latest inflation figures forced the Fed to act more    firmly. 

However, Jerome Powell explained that hikes of this magnitude are not the norm, while warning that the July meeting should still result in a 50-75 basis point hike, depending on the macroeconomic data that will come in by then. The speech led to a sharp drop in U.S. government bond yields, because the market was afraid of even more aggressive guidance. This is also what allowed US equity indexes to confirm their rebound, with the Nasdaq, for example, gaining 2.5%, ending a hemorrhage of five consecutive sessions in the red.

As always, we have to wait for the dust to settle to gauge the real implications of the Fed's announcements. Already, this morning, all three Wall Street indexes are in the red, with the Nasdaq 100 down 2.5%. The market might be going from: "OK, the Fed has decided to take the inflation problem in stride, but they seem to think that the economy will not face a hard landing, even though they have lowered their growth forecasts and dropped mentions of a strong labor market in their communication", to: "The Fed has decided to take the inflation problem head on, but they've screwed up big time in their assessment of the situation for the past two years, and they're not handling the shockwaves of raising rates to over 3% by the end of the year very well." The next few days will tell what version of events wins.