Fed react: Dot plots send short-term yields and dollar higher, Gold tanks, Oil turns negative

US stocks tumbled after the Fed’s dot plots told Wall Street it was the last call for stimulus trades.  The dollar soared as short-term Treasury surged after Fed Chair Powell signaled inflation has increased notably and will likely remain elevated before moderating.  The Fed finally had a ‘talking about talking about’ meeting, but financial markets seem confident the Fed already has a progress-dependent tapering plan in mind. 

The S&P 500 index pared some of the post-Fed statement/projections after Powell’s press conference delivered a handful of dovish reminders: vaccinations have a ways to go, that the base case is still that inflation is driven by reopening momentum, and that they are ways away from substantial further progress. 

Fed

The Fed kept the target range unchanged between 0.00-0.25%, raised interest it pays on excess reserves (IOER) from 0.1% to 0.15%, and delivered a very hawkish dot-plot forecast.  The Fed statement was filled with optimism given the success in getting Americans vaccinated and recent robust economic activity, but still carried some cautiousness that the economy is still not out of the woods. 

The dots showed three more policymakers joined the four in March in supporting a rate rise in 2022.  Now 13 of 18 Fed officials support at least one rate hike by the end of 2023, with the median forecast showing two rate increases.    Financial markets are still expecting the first full Fed rate hike by the end of 2022.     

Oil

Crude prices gave up earlier gains after a surprisingly hawkish FOMC dot plot sent both Treasury yields and the dollar higher.  WTI crude rose after a mostly bullish EIA crude oil inventory report.   Americans are traveling as jet fuel demand improved to the highest level since the end of May and as gasoline demand rose by 900,000 bpd.

Saudi Energy minister noted that the oil market is not out of the woods yet and that the OPEC+ cautious approach is paying off. 

The short-term rebound in the dollar will likely be a speed bump in WTI crude’s path higher. 

FX

Currency traders are giving the dollar its crown back.  The dollar surged today after the Fed showed a much quicker rate hike schedule.  The Fed was mostly expected to stay the course, but today’s optimistic FOMC statement and forecasts shows the economy is making progress towards their goals.  The dollar was ripe for a rebound, but the beginning of a longer-term this is not.  The Fed will still remain highly accommodative for the rest of this year and most of next year, which will still allow the major central banks to move well in advance.    

Gold

Gold lost its mojo after the Fed’s latest economic projections showed the last call for stimulus was nearing.  The Fed’s hawkish pivot is a major buzzkill for gold bulls that could see some momentum selling over the short-term.  Short-term Treasury yields will continue to rise and that should provide some underlying support for the dollar, which will keep commodities vulnerable. 

Despite the recent weakness for gold over the past week, gold’s medium-and-longer term outlook remains bullish.  The line in the sand that needs to be defended for bullish bullion investors is the $1,800 level.   

Cryptos

Bitcoin pulled back after testing the upper boundaries of its recent $30,000 to $41,000 trading range.  Bitcoin needs to add another log on the fire to get cryptocurrency traders excited.  Following the El Salvador commitment to Bitcoin, the cryptocurrency community is awaiting which country is next.  Bitcoin either needs to show progress on becoming carbon neutral or have a couple more countries accept Bitcoin as legal tender. 

A stronger dollar sent Bitcoin tumbling as all risky assets sold off.  Bitcoin's consolidation phase should continue a while longer.