The week started with US Treasury Secretary Janet Yellen stating in a prepared Senate testimony that she thinks the US economy faces unacceptable levels of inflation and headwinds from supply chain disruptions. Well, this fact is not unknown in the market and stock traders were simply just glad that she finally admitted it.
Target’s profit warning did not do much to cause stock prices to fall early week, however, as Friday drew near, concerns over the CPI numbers led stocks to start retreating from Thursday.
The 10-year Treasury yield started rising again on Thursday, as traders began to price in higher rates. The traders were right as Friday’s release of the CPI showed that inflation surged higher than expectations, up 8.6% against consensus estimate of 8.3%. More importantly, the figure the FED is sensitive to, the Core CPI, was also 0.1% higher than estimates, coming in at 6%.
The hot inflation readings have flamed concerns about a potential recession for the US economy, with the preliminary June reading for the University of Michigan consumer sentiment index coming in well below expectations – hitting its lowest point in history.
Market Research Report: Inflation Shock Crashes Stocks But Lifts USD And Gold, Crypto Sees Weekend Dump - Consumer Sentiment
Stocks were crushed, with broad-based selling seen in all sectors as the week drew to a close. The Dow fell 4.58% for its 10th down week in the past 11. The S&P lost 5.05% and the Nasdaq bled 5.60%, for their ninth losing week in 10 and the worst week since January.
Yields spiked as expectations of a more aggressive FED sent the USD higher. The 2-year Treasury yield, which is seen as one of the most sensitive to FED rate hikes, jumped above 3% on Friday to hit its highest level since 2008, while the 10-year surged to 3.18% before closing the week at 3.165%. Traders are now pricing in a 50% chance that the FED would hike 75-bps in July. Some banks are even predicting that the FED could up 75-bps in this Wednesday’s FED meeting. Hence, this FED meeting, and its post-meeting press conference is going to be keenly watched by many.
It was a similar situation at other countries, with a series of rate hikes by several other central banks last week. To name a couple, the Reserve Bank of Australia raised its benchmark interest rate by 50-bps to 0.85% on Tuesday, shocking market participants. Only 3 out of 29 economists polled had predicted the outcome, with most expecting only a 25-basis point hike.
The Reserve Bank of India also raised its benchmark interest rate by 50-bps to 4.9% on Wednesday.
The ECB similarly showed its hawkishness during the ECB policy rate meeting on Thursday, where the central bank confirmed that its net asset purchases under its asset purchase programme (APP) will end on 1 July 2022. It has also revealed that it will raise its key interest rate by 25-bps in July, while hinting at another hike at the September meeting.
Further to that, the ECB also raised inflation expectation to 6.8% from 4.5%, while at the same time, cutting its 2022 growth forecast to 2.8% from 3.7% and 2023 to 2.1% from 2.8%. Traders have now moved the ECB rate-hike expectations up to around 150-bps by December 2022.
Gold appears to be benefitting from the higher inflation however, gaining 1.3%, while Silver was unchanged last week. Both precious metals are weaker by about 1% in the new week as the USD continues to gain strength in Asia trading today.
Oil continued to surge higher after Goldman Sachs raised their price target for oil this year to $140 from $125 previously, citing the need for oil price to average around $135 per barrel for the next one year for the current supply crunch to be normalised. However, the black gold retreated towards the end of the week as the high possibility of global slowdown could reduce the demand for oil. Nevertheless, oil was still higher by around 2%, with Brent closing at $121.90 after hitting an intra-week high of $124, while Crude ended the week at $118. Oil is starting the new week almost 2% weaker though, as China has resumed its lockdown after opening up its economy for barely a week. Brent is now flirting with $120 after hitting a high of $124 last week.
Cryptocurrencies were crushed, with late-week action over the weekend posing the biggest damage. ETH was the biggest large cap casualty, losing a whopping 23% and dragging other altcoins with it. BTC was not spared either, although its role as a crypto safe haven prevented it from losing more for the time being, dropping only 14% in sharp contrast to how it started the week.
The week for crypto started with a bang as prices rose around 10% overall on the back of rumours of whale buying. That hope soon turned the other way around as new sell walls were reportedly observed on Binance. Crypto gains soon evaporated on Monday evening as a sudden dump brought prices back down again as over $200 million of longs, who were conned into chasing the rise on Monday, were liquidated.
Crypto prices started showing signs of weakness from Tuesday when a new bearish report issued by Morgan Stanley likens the current weakness in crypto market, the failure of a dollar stablecoin and a reduction in leverage in DeFi, the crypto equivalent of quantitative tightening. However, the big crash came after the CPI number release on Friday, where the dump worsened over the weekend. The higher-than-expected CPI number could merely have been an excuse to dump, as fundamentals within the crypto sector has already been under pressure from regulators.
