Since the start of the month we have increasingly seen hopes of a Fed ‘soft landing’ gain traction as US stocks made another run higher. However, hopes of a soft landing were dashed by Tuesday’s US CPI print which came in firmer than expected and once again raised the prospect of a Fed needing to hike aggressively in order to tackle stubborn inflation. Stocks quickly erased a few days of steady gains and found near term support at obvious daily support. Look at the Dow, Nasdaq, and the S&P500 below:

The Fed meeting

The Fed meet next week and we are now in the blackout period. That means we will not hear from the Fed until the decision on Wednesday evening. Does that mean we will see USD strength into next week? Most likely as the market is in a USD buying bias and even higher rates will not only favour US rate differentials, but safe haven flows may boost the USD as well. The disorderly moves in the stock market, and volatility rising, on the hot CPI print can certainly generate more USD interest.

The medium term bias is so uncertain

This is the tricky bit. Where is the global economy heading? Is this latest US inflation print a one off return to a high reading or is inflation going to be stickier? Is Ukraine’s push back of Russian troops going to accelerate a potential peace deal between Russia and Ukraine? Can the Fed manage a soft landing after all and will the coming rate hikes be enough to cool inflation without hitting the US economy too hard? Can China manage to rebound this year by getting both Covid under control and supporting its struggling property sector? Will surging energy prices keep economies struggling? The list could go on, but in markets like these it is generally best to be patient. If you want to pick a medium term bias, that is fine. However, just make sure that your risk is carefully managed and you have accepted the risk.