The US Federal Reserve is back on an aggressive rate hike course. RBA plans to take a pause

The stock market fell on Tuesday as hawkish remarks from Federal Reserve Chairman Jerome Powell increased the odds that the Fed will return to an aggressive rate hike course. The main talking points from Powell’s speech yesterday were:

• The Fed is poised to accelerate rate hikes if economic data comes in strong;
• The rate hike is likely to be higher than many expect;
• Further rate hikes are appropriate;
• Premature easing is undesirable at this point;
• It is appropriate to hold the rate at an elevated level for some time.

The prospect of a US rate hike to 6% is becoming quite real. According to BlackRock Inc. and Schroders Plc, given a robust labor market and sustained inflation, there is a real possibility that the Fed will have to bring the federal funds rate to 6% and then hold it at that level for an extended period of time to slow the economy and bring inflation down to nearly 2%. Swap traders now estimate a full percentage point increase in Fed rates over the next four meetings. The Fed’s rhetoric also risks dampening the outlook for emerging market assets.

The OECD’s latest “Canadian Economic Outlook” says that faster growth in living standards will require a stronger business environment to bring Canada’s weak productivity and investment growth in line with the leading economies. As an open economy, Canada will be vulnerable to any sudden slowdown in global demand and to volatility in commodity and financial markets due to the war in Ukraine in the future. The review presents updated GDP growth forecasts of 1.3% for 2023 and 1.5% for 2024. The tight monetary policy last year will help bring inflation down to 2% by the end of 2024.

The European Central Bank (ECB) is increasingly concerned about the current level of inflation in the single bloc. There is now talk of an additional ECB interest rate hike of 200 basis points in the coming months to combat persistently high price pressures in the eurozone, raising the central bank rate to 4.5%.

Precious metal prices just collapsed yesterday on the back of Powell’s speech to Congress. Gold and silver are inversely correlated to government bond yields. As monetary policy tightens and interest rates rise, government bond yields go up, which puts downward pressure on gold and silver quotes. For the resumption of the uptrend in gold, it is very important that the US Federal Reserve stops tightening monetary policy.

Asian markets traded yesterday without a single trend. Japan’s Nikkei 225 (JP225) gained 0.25%, China’s FTSE China A50 (CHA50) shed by 1.17%, Hong Kong’s Hang Seng (HK50) ended the day down by 0.33%, India’s NIFTY 50 (IND50) did not trade yesterday, while Australian S&P/ASX 200 (AU200) ended the day up by 0.49% gain.

Major Japanese companies are expected to hold the biggest wage hike in 26 years during next week’s wage negotiations, giving policymakers hope that the country will finally emerge from its deflationary stagnation. This will be crucial for the Bank of Japan (BOJ) as to how soon the bank can end its bond yield control policy under new Governor Kazuo Ueda. It will also be a test of Prime Minister Fumio Kishida’s flagship “new capitalism” policy, which aims to distribute wealth more widely to households by inducing firms to raise wages.

The Reserve Bank of Australia is close to pausing the process of tightening monetary policy. The main takeaway from yesterday’s speech by RBA Governor Lowe was:

• We’ve done a lot in a short period of time;
• At some point, it will be appropriate to sit still;
• If the data before the next board suggests a pause, we will do that;
• We will have a completely open mind at board meetings.