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Stocks sink as high-level talks disappoint, inflation at highest in 40 years, ECB to end QE sooner, bitcoin falls

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US stocks declined after both high-level talks did not produce a stop in fighting and as investors worry that war in Ukraine could lead to higher inflation for much longer.  Today’s inflation report showed widespread pricing pressures before the full impact of the global shock from the Russian invasion of Ukraine.  Energy costs, soft commodities, and metals will continue to see upward pressure and that will start to be sticky as wages soften.

CPI

Inflation was heating up everywhere and this was before Russia invaded Ukraine.  Consumer prices sharply rose in line with expectations, making a fresh 40-year high.  Gasoline, food and apparel prices sent US inflation to a 7.9% annual rate last month, matching the consensus estimate.  Inflation will only get worse over the next few months and that should eventually put the Fed in a position to deliver supersized rate hikes during the summer.

ECB

The ECB is struggling to deliver on its inflation mandate and will let fiscal authorities handle the economic growth shock from the Ukraine crisis.  The ECB is focused on the exit of stimulus and the rolling off of the QE program in the third quarter could be accompanied with an interest rate increase.  The ECB will be nimble going forward, but right now it sees they will end their net asset purchases a lot sooner. To the surprise of no one, inflation forecasts skyrocketed up from 3.2% to 5.1% in 2022, while growth was chopped down from 4.2% to 3.7%.

The euro initially rallied and settled sharply lower after the ECB press conference.  Money markets now expect the ECB to raise rates in September. The dollar remains king but some traders are arguing that the bottom in the euro may have been put in place earlier this week.

Bitcoin slides on risk aversion

Bitcoin is down sharply as risk aversion returned after high-level talks between Russia and Ukraine came up empty.  I may start to sound like a broken record, but bitcoin will not be able to break above the USD 45,000 level until risk appetite is firmly back in place.  Bitcoin needs to see a major de-escalation with the Russia-Ukraine war before investors get a better handle on how aggressive Fed tightening will be and whether inflation has become too sticky and that economic growth will not bounce back as strongly.

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