The Fed blinks, what’s next?

Fed loses faith in its own projections

Fed loses faith in its own projections
For months the Fed was strident that inflation would be transitory and that holding down rates would aid a ‘broad and inclusive’ recovery.
In one afternoon, they threw it all away.
Powell blinked after a pair of high CPI readings and now the market is pricing in a hike in 2022. All fighting for credibility was wasted, there is no new regime.
In Powell’s telling, this is an adjustment due to a faster rollout and more confidence in employment growth but even that undercuts his old assertion that they were waiting for realized gains in employment rather than forecasts.
So the dollar is off and running. That’s the right move. The market will continue to price in rate hikes now and there’s little the Fed can do to jawbone. Equities are holding up ok but I fear they’re vulnerable as well. There is some hope though in the fixed income market where yields are flat across most of the curve and down 3 bps in 30s.
There’s no need to fight the dollar strength now. There are crowded shorts in dollars and this is a genuine fundamental shift.

Eurozone April construction output -2.2% vs +2.7% m/m prior

Latest data released by Eurostat – 17 June 2021

  • Prior +2.7%; revised to +4.1%
  • Construction output +42.3% y/y
  • Prior +18.3%; revised to +20.0%
There is still some slack evident in construction activity in the region, with civil engineering work falling 6.1% and building construction down 1.0% in April relative to March. That said, this is capturing a lagging period (two months ago) so I wouldn’t look much into it.
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