35. A lesson on INFLATIONFolks,
This is the hottest topic nowadays. Everyone is talking about it. How high will it go? When will it end? The obvious reason being solely to predict when the Fed will pivot.
Lets look at the MARKET reaction to date. When 2Q GDP was announced, US02Y drop below the 50MA. This is the market saying the pivot is near. The Fed will stop hiking rates because the economy is contracting and in recession. Since then, the market has sobered up and is now anticipating a 50bps hike next month (current = 2.50% + 0.50 = 3.00%) and is hovering around 3.00%. We can see from this that the MARKET is indeed VERY OPTIMISTIC and is somewhat ignoring the recent DOT PLOT.
But for us, it is best to really understand the situation correctly. This is often not found/mentioned by the MSM. Inflation is a topic best covered in mystery and not easily predictable. Or is it?
Lets use some logic and common sense.
INFLATION WILL END 13 MONTHS FROM THE DATE WHEN THE HIGHEST PRICE WAS RECORDED. And when we talk about price, the easiest would be to use the single most important commodity - OIL. USOIL traded at the high of $129.416 on 8 March 2022 . So regardless of what the Fed do or not do, inflation will start to normalize sometime in March 2023.
Get it? For example, you may be paying $2/gallon. But because of inflation, price suddenly jump up to $5/gallon. Even if price continue to stay at $5/gallon, 13 months later, there would be no inflation as price remain the same y-o-y.
It is just some statistical shitfuckery used by the policy maker to justify that things are back to normal.
That is why the stock market is so 'RESILIENT' - they are just waiting for the coming happy time just a few months away.
That is why the market is so bold to even ignore the DOT PLOT.
Lets continue to monitor the US02Y. And when it really drops below the 50MA and below the FFR, then we might see the Fed finally capitulate to Market Demand.
Good luck.
P/S : As always, do not just believe what I say. Use your common sense.
1) Do not forget beside the FFR, there is also a Balance Sheet Reduction going on. This will impact liquidity and based on latest Fed talk, they are indeed serious about this this time around.
2) There is still a war going on in Ukraine and this has direct impact to EURUSD we are trading. Regardless of pivot or not, the situation in Euro Zone is quite dire. Germany is collapsing and without GAS, they are looking at a DEEP and LONG recession in the coming months.