Overnight Headlines

*Fed lays out plan to step up inflation fight and prune balance sheet

*Asian shares retreat spooked by hawkish Fed minutes and speakers

*Dollar buoyant as weak yen turns more toxic for Japan

*Bitcoin drops most in a month as markets turn risk-averse

US equities fell again on Wednesday, led once more by growth, tech stocks. The Nasdaq dropped another 2.2% while the S&P500 slid 1%. The 10-year US Treasury yield rose to a three-year high at 2.66%. Defensives and materials were the only sectors higher on the day. Asian shares have retreated in line with the global selloff. US futures are pointing to more losses, European futures are very modestly in the red.

USD surged to a two-year high as the FOMC readied for tighter policy. DXY posted a peak of 99.76 yesterday and is holding above support at this year’s top at 99.41. EUR fell below 1.09 before retracing to close lower for a fifth straight session. GBP dropped to a three-week low at 1.3046 before finishing largely unchanged. AUD’s spike after the RBA was fleeting and the major has fallen below 0.75 this morning.

Market Thoughts – Fed comments push yields higher

The FOMC minutes were pretty much on a par with what we wrote yesterday. Certainly, the market reaction was, as yields and the dollar popped up to new cycle highs. Brainard had given us a fair warning of what was to come. It is clear the Fed would like to front-load rate hikes to rein in policy that is way too accommodative given surging inflationary pressures and a strong labour market. Balance sheet reduction (QT) will also start at the next meeting.

Half point increases are now being forecast for the next three Fed meetings. QT should do some of the policy tightening so there should be smaller hikes further out. But finessing policy into more restrictive territory is prone to a policy error and curve inversion is pointing to a recession at some point down the road. Can the dollar now consolidate its recent gains at two-year highs?

Chart of the Day – Nasdaq under pressure after hitting SMAs

Investors are grappling with a combination of rising inflation in the US and Europe, conflict in Ukraine and an escalating coronavirus outbreak in China. Nomura estimated that 23 Chinese cities have implemented full or partial lockdowns. This collectively is home to nearly 200 million people and contributes 22% of the country’s GDP. On top of this, the Fed is now in tightening mode and the goal is to depress aggregate demand.

Growth stocks have taken the brunt of this over the last couple of days. Both the 100-day and 200-day SMAs in the Nasdaq have formed a strong resistance zone at 15,137/154. Prices have fallen to support at the October low at 14,384. The Fib level of the November high/March low is also near at 14,450. There is not much near-term support if we lose this and the 50-day SMA support at 14,330.