The Fed’s mandate is inflation, not growth

Outlook: On Friday we wrote it was hard to see the dollar gaining much more, and boy, did that turn out to be true. Every single currency rose, with some erasing nearly all the gains of the day before, including the euro. This is more likely profit-taking and squaring up ahead of the US holiday, not an actual change in sentiment. We still have two Feds having said they would have preferred 50 bp at the last FOMC and general fear the Fed is about to get more hawkish. The minutes of the last meeting are due on Wednesday and people will parse very word as usual, despite the shockingly bad data having come in after the meeting and deliberations.

The market smells that the next hike could be back to 50 bp. As noted before, we are starting to get the normal inverse correlation between rates and equities, something that had weirdly gone away for a while in favor of the illogical idea that high growth trumps inflation. It doesn’t. The Fed’s mandate is inflation, not growth. This bodes ill for the US stock market if it persists. Unfortunately, we need to wait for the dot-plot at the March 23 FOMC to find out, although comments from Feds before then could do the trick. It’s possible that we are seeing an overreaction.

If the Reserve Bank of New Zealand performs as expected on Wednesday, it will deliver the 50 bp hike. Then we wait for Friday, when we get the PCE inflation version, probably down only one tick to 4.9% and core to 4.3%. Canada reports inflation tomorrow and Japan on Friday, possibly a barnburner to 4.4%. Most of the week will feature sentiment indicators (Ifo, ZEW, GfK) and the flash PMI’s for the big European countries and the US.

Forecast: Today is a holiday in the US and tomorrow is pullback Tuesday–we might even see the euro rise past the previous high back into 1.0700 territory. But probably not. The trajectory has been established and we should see the euro creep back to the Friday low at 1.0611, if not in a straight line.

Tidbit: Regulators are cracking down on crypto almost as fast as crypto companies are failing.

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