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Fed hikes rates and lifts forecast

The Fed raises interest rates, Trump offers a warning on China trade tensions, and the Bitcoin bloodbath continues. Here are some of the things people in markets are talking about.

Fed Pulls the Trigger

Federal Reserve officials raised interest rates for the second time this year and upgraded their forecast to four increases in 2018, as the unemployment rate falls and inflation rises. The “dot plot” released Wednesday showed that eight Fed policymakers expected four or more quarter-point rate increases for the full year, compared with seven officials during the forecast round in March. The number viewing three or fewer hikes as appropriate fell to seven from eight. The median estimate implied three increases in 2019, to put the rate above the level where officials see policy neither stimulating nor restraining the economy.

China Clash Coming?

U.S. President Donald Trump said he’ll confront China “very strongly” over trade in the coming weeks, sending a warning to North Korea’s biggest trading partner after his meeting with Kim Jong Un. “China could be a little bit upset about trade, because we are very strongly clamping down on trade,” Trump said in an interview with Bret Baier of Fox News. The interview was conducted Tuesday aboard Air Force One after Trump met with the North Korean leader in Singapore.  The White House has said it’s proceeding with plans to impose duties on $50 billion of Chinese goods, after weeks of discussions between the U.S. and China yielded little progress on a trade deal. China has vowed retaliatory tariffs and warned that it wouldn’t deliver on any commitments over trade if the U.S. duties take effect.

Pompeo Rebuts Summit Criticism

Secretary of State Mike Pompeo said he expects North Korea to take major steps toward nuclear disarmament during Trump’s first term, as the U.S. president tweeted that there’s “no longer a Nuclear Threat from North Korea.” Pompeo, speaking to reporters in Seoul on Wednesday, sought to quell criticism that North Korea didn’t make any substantial commitments at the summit in Singapore. Trump has come under increasing criticism because the brief statement he and Kim Jong Un signed in Singapore spelled out no specific commitments from North Korea aside from working toward the “complete denuclearization of the Korean Peninsula,” a promise the regime has repeatedly made and broken since the 1990s.

Bitcoin Slump Continues

Bitcoin extended its losses, bringing its four-session slide to as much as 20 percent as questions mount about whether the world’s biggest cryptocurrency was manipulated during last year’s record price surge. After rallying more than 1,400 percent in 2017 amid an investor frenzy for digital assets, Bitcoin is down almost 70 percent from its record high of $19,511 in December. It fell as low as $6,134 Wednesday. The virtual currency has struggled to reverse a selloff amid negative news such as a study of possible price tampering with Tether. Bloomberg News reported in May that the U.S. Justice Department had opened a criminal probe into trading practices that can manipulate the price of Bitcoin and other cryptocurrencies.

ECB on Tap

Buy euros, sell bonds. That’s the takeaway from strategists who expect European Central Bank President Mario Draghi to announce on Thursday an end to the institution’s asset-purchase program as the immediate risks surrounding Italian politics subside. Traders have been emboldened by the likes of ECB Chief Economist Peter Praet, who signaled last week that the meeting could be pivotal in deciding on an end date for quantitative easing. “That the ECB’s chief economist is still talking about policy normalization, even as the Italian political crisis rages, reinforces our belief that euro-dollar will get to 1.30 in the next six to 12 months,” Societe Generale strategist Kit Juckes wrote in a note to clients. The euro is currently at about $1.18.

What we’ve been reading

This is what caught our eye over the last 24 hours.

  • How to cash in on the World Cup.
  • U.S. stocks dropped on the Fed’s mildly hawkish tone.
  • Carson Block is shorting Chinese tutoring firm TAL Education.
  • ZTE will face some big challenges even if it manages to stay in business.
  • Drone swarms are lighting up China’s skies

And finally, here’s what David’s interested in this morning

Central banking is a lot like silent clubbing. Silent clubbing is a bunch of people partying but instead of music blasting through loud speakers, everyone has wireless headphones on. In some cases, you can choose your own beats but for the most part everyone gets piped the same music. Obviously for someone who’s just watching, you’re looking at a bunch of people dancing to nothing mostly in step. For our purposes, the dancers are central banks, the onlookers are money managers, and the Fed is the DJ. The absolute worst thing you can do is to not groove along, almost irrespective to your level of dance skill, rhythm, soberness. There will be times your circumstances take over and you’re likely better off doing rumba or salsa steps while most are hip-hopping, locking and popping. At some point though, it will make sense to get back in line.

That’s precisely why several emerging market central banks have had to follow the Fed higher notwithstanding domestic economics. You don’t want to draw attention and get picked on. Ask Turkey or Indonesia. So the Fed’s raised rates again. Count on it that the story that takes over in a couple of hours may be about the People’s Bank of China following suit again, sort of — same hip movement but with slightly less thrust. See the chart above, or better yet, read about it here. If the bank does tighten money market rates, we’ll usually know at about the same time as cash markets open.

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