June 9, 2023

What’s happening: The fade is Its prime interest rate is expected to rise Three-quarters of a percentage point from 3% to 3.25% on Wednesday. But investors see some room for even bigger growth.

They’re putting 18% odds on a dramatic full-point hike, a move that would jolt markets and reinforce the narrative that the Fed will do whatever it takes to bring inflation under control.

Arguments can be made for both options. On the one hand, inflation rose uncomfortably, with consumer prices rising at an annual rate of 8.3% in August. This indicates that the cost of borrowing may be higher to reduce demand and prevent further problems ahead.

Yet the Fed knows it takes some time for past rate hikes to eat through the system. And if its playbook is too tough, it could lead to a damaging recession and massive economic pain, as well as reduce its options for future meetings.

“The faster the Fed raises rates, the more likely they are to be wrong,” Gennady Goldberg, senior U.S. rate strategist at TD Securities, told me.

A big question also looms: can central banks Maintain confidence That it will successfully bring about inflation, a primary reason for its existence?
Chair Jerome Powell shook faith in the Fed by mistakenly insisting that inflation was “transient.” This misjudgment means the Fed has delayed addressing the problem and now needs to be more aggressive.

Since then, some credibility has been restored. Bond market expectations for long-term inflation have fallen sharply in recent months, suggesting investors think the Fed is doing its job.

Take a look: Compare yields on standard US Treasury bonds protected against inflation. The difference — known as the breakeven rate — tells you how much inflation investors anticipate.

The five-year breakeven rate stood at 2.48%, down significantly from a high of 3.59% in March and not far from the Fed’s 2% target. The 10-year breakeven inflation rate sits at 2.4%.

“A lot of that has to do with the Fed’s very dovish tone and commitment to keep hiking rates until inflation is under control,” Goldberg said.

Still, he cautioned that it was too early to “declare mission accomplished.”

“It’s a very tenuous restoration of that confidence and that faith in the Fed,” Goldberg said. “The difficulty now is the Fed has to follow through. It’s easy to promise to be reckless in the pace of policy tightening or to promise to be very aggressive, but you really have to deliver that tightening at the end of the day.”

Dollar hits new 20-year high as Putin escalates war

The US dollar rose to a New two-decade high Russia said on Wednesday it was mobilizing 300,000 military reserves Escalation of war in Ukraine.

The latest: In a televised national address on Wednesday, President Vladimir Putin announced an immediate partial mobilization of Russian citizens and threatened to use “all means at our disposal” to protect Russia and our people. He also mentioned the possible use of nuclear weapons.

The speech pushed the greenback up 0.4% against a basket of major currencies to its strongest level since 2002. Investors often seek safe havens in US dollar assets during times of geopolitical tension.

Oil prices have also increased. Brent crude futures, the global benchmark, rose more than 2%, rising to just under $93 a barrel.

The war has added pressure for investors, as it makes it harder to predict when inflation will ease and could push central banks to maintain an aggressive tack for longer.

This has been linked to uncertainty around energy supply. Although Germany’s gas reserves have reached 90% of capacity, concerns remain.

German Economic Affairs Minister Robert Habeck said the country could “get through the winter well” without Russian gas, but warned that supply levels could be “absolutely bare” later.

And the cost is increasing. Germany nationalized its gas giant Uniper on Wednesday after a bailout attempt failed to prop up the utility.

On the radar: Kremlin-backed authorities in eastern and southern Ukraine have announced they will hold a referendum on joining Russia this week. This may mark another important point of conflict.

‘SPAC King’ loses his crown

Chamoth Palihapitiya Created his brand boosting SPACs, “blank check” companies that go public and then seek takeover targets. They exploded in popularity during the recovery from the pandemic, but have since fallen out of favour.

Now, even outspoken venture capitalists are facing consequences.

Palihapitia announced Tuesday that he would close after failing to find companies to merge with two SPACs. Any funds raised will be returned to shareholders.

“Ultimately, getting a deal done would have required us to raise the price or buy an inferior asset – neither of which we were comfortable doing,” Palihapitiya said. He also said he saw “resistance from management teams who were not ready or willing to go public in the face of the current volatility.”

Step Back: Palihapitiya was one of the leading proponents of SPACs and developed a cult following among everyday investors. Yet his approach to investing has taken a hit this year as markets have tumbled, a sign of how quickly Wall Street’s fortunes have changed.

in stock Virgin Galactic (SPCE) and SoFi Technologies, previous companies he helped take public, are down 62% and 63% in 2022, respectively.

coming next

General Mills (GIS) US markets report earnings before the open. KB Home (KBH), the laner (LEN) And Trip.com (TCOM) Follow up after closing.

Also today:

  • US existing home sales for August post at 10 am ET.
  • The Fed announces its latest policy at 2 pm ET, followed by a press conference with Chair Jerome Powell.

Coming tomorrow: Recent policy decisions by the Bank of England, the Bank of Japan and the Swiss National Bank

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