Pre-market equities: Central banks are desperate to make up for past sins

Earlier, Fed Chair Jerome Powell had indicated that the central bank would raise rates by half a percentage point this month. But worrying inflation data released last Friday, which showed prices up 8.6% in the 12 months to May, underscored the need for more aggressive action.

“I don’t expect moves of this size to be common,” Powell told reporters. Still, he left the door open for another increase of the same magnitude next month if the data doesn’t improve.

The Fed is not alone in trying to prove it is on the ball.

The European Central Bank held an emergency meeting on Wednesday after an announcement last week that it intends to raise interest rates for the first time since 2011, stirring bond markets in Italy and Greece.

After the meeting, the ECB said it would accelerate work on new ways to reduce stress in these highly indebted European countries as interest rates rise.

Investor Insight: Central bankers managed to calm the markets on Wednesday. The S&P 500 ended 1.5% higher, breaking a five-day losing streak. Yields on benchmark Italian and Greek bonds, which move oppositely in price, fell as selling pressure eased.

“The market looks happy right now,” said Jeffrey Frankel, co-chairman of Stuart Frankel & Co., a stockbroker.

But investors are having second thoughts on Thursday. Trying to correct past mistakes is hard work. It can also limit future policy options.

If the ECB had made it clear at its meeting last week that it would not tolerate “fragmentation” in Europe’s bond market – referring to the rapid rise in Italian and Greek bond yields – it would not have had to correct course, according to to Holger Schmieding, chief economist at Berenberg Bank.

Switzerland gets first rate hike in 15 years

The ECB clearly has the ability to intervene as needed. But the communication lapse can have lasting consequences, he argued.

“The ECB [on Wednesday] managed to reverse part of the liquidation,” he said in a note to clients. “But after the turmoil of the last few days, the markets are now more nervous than before.”

Strategists are also concerned that the Fed’s sharp rise in interest rates could increase the chances of a US recession by quickly putting the brakes on growth.

“Inflation is strong and hasn’t peaked, so Powell is stuck,” said Kenny Polcari, managing partner at Kace Capital Advisors. “They should have been more aggressive earlier in the process.”

When will bitcoin liquidation hit rock bottom?

Bitcoin has fallen this week as selling digital assets shows little sign of abating, fueling debate among die-hards over how much more prices can fall before they begin to level off.

The world’s most valuable cryptocurrency nearly hit $20,000 on Wednesday. It has lost about 70% of its value since hitting an all-time high in November last year, when it traded around $69,000.

Dropping below the $20,000 barrier would be a worrying milestone for a market that has grown during the pandemic, analysts say.

“A move below $20,000 would be a major psychological blow and could send bitcoin further into freefall,” said Craig Erlam, a senior market analyst at Oanda, a foreign exchange firm.

Ether, the second most valuable digital currency, has already lost nearly 80% of its value since its November peak.

As central banks raise interest rates to control inflation, traders rule out riskier investments, including volatile crypto assets.

But long-term investors are ignoring extreme price drops.

“Cryptocurrency bear markets typically fall between 85% and 90%,” said Jason Yanowitz, co-founder of Blockworks, a research platform for cryptocurrency investors.

During the downturn in 2017 and 2018, bitcoin plummeted 83% from $19,423 to $3,217. It recouped all those losses at the end of 2020 and went up in 2021.

“I really disagree with people who say there’s no way to recover from something like this,” Yanowitz said.

Consumer spending falls as inflation bites

The high cost of gas and food is causing US consumers to cut back on other items, another sign that the US economy – while still looking solid – may be starting to lose steam.

Retail sales in May fell 0.3% from April, the first drop in spending this year, according to data released on Wednesday.

Spending at gas stations increased 4% in May compared to April. That’s a 43% increase compared to a year ago, driven by rising prices at the pump. Spending at supermarkets, where prices are also rising, rose 1.2% from April.

Meanwhile, spending at other retailers was down 1% compared to the previous month.

The numbers were softer than expected. But they could have been worse, given how quickly sentiment among consumers deteriorated. Stress over high gas prices, as well as alarm over stock market turmoil, drove consumer confidence to a record high.

“You see continual changes in consumption, you see some sales going down, but overall spending is really strong,” Powell said Wednesday. “The consumer is doing very well financially.”

Remember: Families still have savings from the pandemic that they can use to cushion the blow of high inflation. Compared to May 2021, retail sales increased by 8.1%.

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