US stocks edged higher after another round of hawkish comments from the Fed and as US economic data softens but provides no reason for the Fed to abandon its firm commitment to bring down inflation. Traders are still optimistic that even if the economy has a recession, it will be a short one. The labor market remains strong, but flash PMI readings show economic growth concerns are valid. Manufacturing activity fell to the lowest levels since July 2020 and initial jobless claims matched a 4-month high. The economy is obviously weakening, and Wall Street is wondering at one point will the Fed pivot from its inflation-fighting focus.
Fed Chair Powell maintained his hawkish stance on fighting inflation, but we got some insight from a dove on when tightening could ease. Fed’s Bowman noted that half-point rate increases could be appropriate for a few meetings after July. The true doves on the Fed seem like they are getting ready to shift to a softer pace of tightening after the summer ends.
Recession talk remains the focal point on Wall Street and that means whatever stock market rebounds emerge will probably be short-lived. Wall Street won’t have any answers anytime soon for the questions on when will inflation peak, how soon will we see a recession, and how high will the Fed raise rates?
The second day of testimony from Fed Chair Powell confirmed that they are data-dependent and completely focused on bringing down inflation. Powell wants to bring down inflation and preserve the labor market recovery. That will be a difficult task but is still very possible as growth in the second half of the year should be very strong.
Bitcoin hovering at USD 20K
Bitcoin remains anchored around the USD 20,000 level as Wall Street tries to figure out how aggressive the Fed will be to fight widespread inflation. Bitcoin remains a risky asset and probably won’t trade on crypto fundamentals until a firm bottom is agreed upon for US stocks.
Bitcoin’s longer-term outlook is for much higher prices, but no one is confident that the bottom is in place. Bitcoin will remain a volatile trade and the correlation with equities seems like it will last for quite a while.