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Have Fed Hike Odds Gone Too Far? – The Macro Setup

Have Fed Hike Odds Gone Too Far? – The Macro Setup

Christopher Vecchio, CFA, Senior Strategist
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THE MACRO SETUP OVERVIEW:

  • US stocks may have started their climb back towards all-time highs
  • Are markets doing the job for central banks by pushing sovereign bond yields higher?
  • The launch of multiple Bitcoin ETFs is a positive for widespread acceptance, but will they be the appropriate trading vehicle?

Rates Up, Stocks Up, Bitcoin Up

In this week’s edition of The Macro Setup, featuring Dan Nathan and Guy Adami, we talked about the rebound in US equities after the worst seasonal period of the year, the jump in bond yields across North America and Europe, and the launch of Bitcoin ETFs over the coming days.

The inflation narrative remains strong, with many policymakers on both sides of the pond – those at the Bank of England and Federal Reserve – conceding that price pressures have been elevated longer than anticipated. In turn, rates markets have priced in nearly six rate hikes by the Federal Reserve through the end of 2023, while the Bank of England is now expected to raise rates as soon as next month.

Against the backdrop of high inflation, slowing growth rates across developed economies continues to provoke fear of stagflation, which can’t be addressed easily by monetary policy alone. Traders may want to keep an eye on news out of Washington, D.C. as talks swirl around fresh stimulus that could help avert a fiscal cliff at the start of 2022 (which could drag the US economy back into recession otherwise).

Nevertheless, with corporate earnings proving strong for 3Q’21 and prospectively continuing to look solid, US stock markets have proven resilient and are now closer to all-time highs than they are to their early-October lows.

Speaking of risk, Bitcoin – the risk asset among risk assets – is within a stone’s throw of its all-time high set earlier this year. But like the CME futures launch, the Coinbase direct listing, and the El Salvador Bitcoin rollout, the launch of Bitcoin ETFs could prove to be another institutional event that marks a near-term top in a ‘buy the rumor, sell the news’ type of situation.

*For commentary from Dan Nathan, Guy Adami, and myself on the US Dollar (via the DXY Index), the US S&P 500, gold prices, Bitcoin, among others, please watch the video embedded at the top of this article.

CHARTS OF THE WEEK

Eurodollar Futures Contract Spread (October 2021-DECEMBER 2023) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [WHITE]: 4-hour Chart (August 2021 to October 2021) (Chart 1)

Have Fed Hike Odds Gone Too Far? – The Macro Setup

GOLD PRICE TECHNICAL ANALYSIS: DAILY CHART (JULY 2020 TO OCTOBER 2021) (CHART 2)

Have Fed Hike Odds Gone Too Far? – The Macro Setup

USD/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (DECMBER 2020 TO OCTOBER 2021) (CHART 3)

Have Fed Hike Odds Gone Too Far? – The Macro Setup

--- Written by Christopher Vecchio, CFA, Senior Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES