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Strong Durable Data Supports Further Fed Tightening

By Anna Peel. Originally published at ValueWalk.

Mid-Term Elections Quantitative Tightening Interest Rate Goldilocks Rate Hike Balance Sheet Runoff end of coronavirus stimulus checks

Selling Rallies, Strong durable data supports further Fed tightening, Oil softens, Gold steadies, Bitcoin weakens – OANDA

Wall Street is poised for a drawn-out period of sluggish economic activity and that has stock traders steadily fading all rebounds that emerge.  Today’s volatile durable goods order reading was rather impressive and while it is only one reading, it suggests the economy is still chugging along and could probably stomach more Fed rate hikes than are being priced in. With a bear market likely at the end of 2023, it is hard to be optimistic about the second quarter rebound that still seems likely despite a lackluster global economic situation.


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US stocks declined as traders continue to fade all rallies as multiples continue to slide as recession fears mount.  Stocks can’t win right now, either the economic data softens and the economy is much weaker than we thought or robust readings pave the way for the Fed to be more aggressive with their inflation fight.

Normally, my coverage does not include the Saudi central bank (SAMA), but that quickly changes when liquidity becomes an issue. Saudi Arabia had to inject ~$13 billion with commercial lenders as a troubling liquidity crunch emerged.  The Fed’s rapid rate hiking cycle is providing liquidity problems and that could be troubling for risky assets abroad.

US Data

Durable goods orders and shipments data for May showed business are still spending. Any chance of technical recession has been removed as the second quarter will likely post a strong snapback from the negative growth reading for the first three months of the year.

The May durable goods order headline rose 0.7%, a strong beat of the 0.2% estimate, and downwardly revised 0.4% prior reading.  There is still a lot of strength in the US economy and that should allow the Fed to stick to their aggressive rate hiking cycle.

Oil

Crude prices remain volatile as energy traders grapple with recession fears and a tight oil market that may see the G7 unveil price caps on Russian crude. Oil might have confusing reactions to economic data until Wall Street agrees upon when the peak is in place for Treasury yields.  Stronger economic data would normally be a positive for the crude demand outlook, but right now the reaction might be negative for oil as traders will view strong readings as a greenlight for the Fed to tighten even more aggressively to fight inflation.

Oil is slightly lower as some traders begin to price in a significant global growth slowdown for next year and as the risks of more supply from Iran remain on the table.

Adding to the downward pressure on oil is the expected resumption of Iran nuclear deal talks. Iran’s Foreign Minister Hossein Amirabdollahian stated “we are prepared to resume talks in the coming days.” EU Chief diplomat Burrell added, “We are expected to resume talks in the coming days and break the impasse.”

Oil has been unfazed most of the year with the prospects of Iranian crude returning to the market because the oil demand outlook was robust. With global economic activity deteriorating as inflation continues to run wild, crude demand destruction concerns won’t be easing up anytime soon.

Gold

Gold prices are steadying as investors debate whether the peak in yields is in place. Gold’s early rally did not last after better-than-expected durable goods data supported the argument that the Fed may have to tighten policy even more aggressively.

Much attention was given to the news that the G-7 would announce a ban on new Russian gold.  Western countries have already been limiting their transactions with Russia, so this ban would merely confirm what most were already doing.

Gold is acting like a surfer and currently paddling through a wave of rising Treasury yields. Gold will ‘pop up’ once Wall Street is convinced they nailed down how high the Fed will take rates and then it can rally on global recession fears.

Cryptos

Bitcoin remains stuck in the $20,000 mud as risk aversion returns on Wall Street. Bitcoin remains a risky asset with a strong correlation to equities, which means it probably won’t be seeing any support anytime soon.  The mood for risky assets is to fade all rallies, which means Bitcoin should remain trapped in its tight trading range a little while longer.

Solana’s news that they will go mobile with a Web3-focused Android mobile phone, reminded traders that crypto can break into anything.  Solana has had a fair share of problems with security, but with each upgrade they are making progress and are still leading the scalability race.  Crypto traders are skeptical of the launch into mobile and Solana’s price has edged lower following the news.

Article By Edward Moya, OANDA

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