Anxiety Around Policy Dominates Sentiment to Kick Off Key Market Week

Last week’s FOMC meeting set off another round of selling in risk assets as investors finally seem to have accepted the notion that this is a hawkish Fed.

Chair Jay Powell hammered that point home repeatedly, reminding investors and analysts that price stability takes strong precedence over growth when the two may be at odds, as they apparently are now.

Powell’s refrain was intentionally reminiscent of another famous Fed Chair — Paul Volcker, who chaired the Fed during the early 1980s. Volcker famously stamped out the inflationary bug of the 1970s, taking the US economy into two recessions in the process.

Powell has been singing in that key, even going so far as to repeat the phrase, “We will keep at it”, over and over during his past several speaking engagements.

Former Chair Volcker’s memoir of his time at the Fed, in case you are interested, was titled, “Keeping At It”.

That may offer a hint as to where things are headed. It certainly seemed to for market participants, who sold everything under the sun in response to the rate hike, which is seen as preceding another 75 bps hike next month before a 50 bps hike to close the year, according to Fed Funds Futures pricing.

One of the big factors in play this week is centered on the US Dollar Index, which has been exploding higher in a parabolic advance that could be a blow-off move after a long and steady trend. The dollar is the best performing major global asset so far in 2022. While that seems like a good thing for most people with assets held in dollar terms, it spells disaster for global risk assets because global debt among emerging markets is dependent on easy access to dollars. A soaring dollar means, ipso facto, poor access to dollars around the world.

That imperils emerging sovereign debt, which is one of the lynchpins of the global economy.

This is just one of many wheels turning right now as the bear market gains steam. With the Fed hellbent on stomping out inflation by destroying growth, it’s wintertime right now. But Spring is always one surprise away.

As we look ahead to the upcoming week, the big day for the market will be Friday, which also happens to be the last day of trade in Q3.

Friday will give us the PCE inflation data for August, which is the Fed’s preferred inflation gauge. We will also see Personal Income and Spending figures at the same time (8:30 am ET). Just ahead of that, we get the latest Chinese PMI numbers (technically out Thursday night) and the latest CPI data from Europe.

Other key economics reads this week will include German Ifo and GfK surveys (Mon and Wed, respectively), U.S. Consumer Confidence number (Tue), and German CPI data (Thu).

Traders should also beware the Italian elections, which will be viewed as a referendum on European energy policies and the continent’s approach to the Ukraine situation.

As far as Fed speakers, keep an eye out for new quips from Powell, Brainard, Williams, Mester, and Collins this week. Some chatter is out there already that the messaging from the Fed has gone too far. We will get the chance to see first-hand whether or not the Fed sees this issue the same way.

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