Last Sunday I wrote that a Fed hike was about to become the base case. After Friday's inflation print the market now prices roughly 90 percent for a hike on Wednesday. But the most important thing this past week was the dollar's reaction to that news. There wasn't one.
1Inflation: hot core, cold dollarFriday's inflation came in at 3.4 percent, as expected. But core inflation, the one the Fed watches most, rose 0.3 percent in a month, more than expected. That should have lifted the dollar. Instead the dollar index closed the week unchanged at 99, and gold and silver even rose on Friday. A hawkish Fed used to give the dollar a lift. Now it isn't enough. That is the erosion I talked about, visible in real time.
2The national debt: the state buys, the market sellsThe Treasury tripled its buybacks of long-dated bonds to 6 billion dollars on Wednesday. The 10-year yield still rose to 4.96 percent, one step from 5. At the same time the ECB hiked to 2.50 percent and Japan is expected to hike on Friday. The whole world is hiking while the US tries to push its own long-term rates down. It doesn't add up, and the market knows it.
3The dollar as a weapon: BRICS builds pipes, not a currencyThis weekend eleven BRICS countries meet in New Delhi. India says no to a common currency and calls it "derisking, not de-dollarisation". But at the same time BRICS Pay is being launched, linking the payment systems of China, Russia, India and Brazil. Nobody is replacing the dollar. They are building around it. Exactly what China has done since 2012.
Oil drives everythingBrent peaked at 107 this week after the US sank eight Iranian tankers and Saudi production fell. Expensive oil keeps inflation up, which forces central banks to hike, which pressures bonds. All three points above are linked in that chain.
The week ahead- Wednesday 14:30 CET: US retail sales.
- Wednesday 20:00 CET: the Fed decision. The hike is priced in; what moves the market is the projections and what Warsh says about October.
- Thursday: Bank of England. Friday: Bank of Japan, expected to hike.
Wednesday's hike is priced in. What matters is two things: the projections, meaning whether the Fed sees more hikes ahead, and what Warsh says about October. A hike described as a one-off is received very differently from the start of a series. Add Japan on Friday, expected to hike for the first time in a long while, and you have a week in which the world's entire rate map is redrawn.