Yesterday was a bloodbath on Wall Street. There is no doubt that traders have been immensely worried about the future path of the US stock market since the US CPI number confirmed that inflation isn’t dead. Now the big question haunting them day and night, making them restless, is whether the Fed’s 75 basis point interest rate hike is dovish. This particular factor has made traders sell their positions on Wall Street and brought short sellers in abundance in the market.
Suppose you look at the market sentiment today. In that case, it is as pessimistic as it could be as major bank’s CEO’s are further adding their colour to this painting and making the picture for the US economy more pessimistic.
However, if history repeats itself, today is the day that we may see the markets exploding to the upside on the back of the Fed’s decision—yes, moving higher even though the Fed may press the interest rate hike button of 75 basis points. This is a crucial point to note here.
After the US CPI reading, the dovish monetary policy stance is associated with an interest rate hike of 75 basis points, and a hawkish monetary policy stance is associated with 100 basis points. The chances of the Fed increasing the interest rate by 100 basis points are slim before but never say never when it comes to central banks, especially after a surprise interest rate of the Swedish Central Bank yesterday which increased interest rate by 100 basis points. So 100 basis point interest rate hike, a number that could pull the rug out of traders’ feet, may not shake things much as we live in a different time frame now. It doesn’t mean that the Fed will increase the interest rate by 100 basis points today. Our base case scenario, by looking at the market price action, remains that the Fed will likely increase the interest rate by 75 basis points. This will be considered a dovish interest rate hike, which once was an immensely hawkish stance.
Over in Europe, the President of the European Central Bank has also made it clear that borrowing costs will increase as the central bank is focused on bringing the monetary policy back to its normal level and wants to control inflation under all circumstances. So, now, the question for traders is if the bank’s stance will stop the bleed for the Euro. Once again, the odds seem to be stacked against them as the price action tells one compelling story: the path of the least resistance is skewed to the downside.
In the UK, the focus, along with all spotlights, is on Prime Minister Liz Truss, whose most significant challenge is tackling the cost of living crisis. The pound is plunging against the dollar like there is no tomorrow. Given the current momentum, the future trajectory of the price action indicates that prices are likely to move lower. It may be only a matter of time before the price hits its parity level against the dollar, especially if the Euro continues to slide and reaches the level of 0.90 against the Euro.
PM Liz Truss is likely to announce significant tax cuts for the poor and the rich to kick start the economic engine of the UK’s economy. The policy may not be that popular among many, but it is undoubtedly a step in the right direction as the UK now needs this initiative.
Stocks
Ford’s stock will be interesting to watch today after the stock price got hammered again yesterday on the back of concerns that the company will struggle with its supply chain and maintaining its price.