FX.co ★ Stock market falls sharply

Major US stock market indices, such as Dow Jones, NASDAQ and S&P 500, dropped sharply on Thursday. In yesterday's article, we noted that the absence of decline on Wednesday evening could not be taken as a logical development. You were warned that the final scene has yet to be acted out. On Thursday, US stock indices and equities collapsed. Investors can thus now be considered to have taken a lead from the 0.75% rate hike and Jerome Powell's promises of further rate hikes in the future. From our point of view, nothing has changed in terms of the fundamental background this week. Previously, the market had expected a more or less soft and slow tightening of monetary policy. Jerome Powell himself repeatedly spoke about this. However, on Wednesday evening, it became clear that the Fed would do anything to ensure that inflation would at least start to fall. The latest report showed that the consumer price index showed no reaction to the fact that the rate had already risen to 1%.The Fed has been stimulating its own economy at least for two years with ultra-low interest rates as well as a QE program, injecting huge amounts of money. It is precisely because of these actions that prices have risen significantly in the last year. If there is much more money in the economy (one and a half times as much) and the amount of goods and services does not increase (which is logical for pandemic times), then sooner or later prices will start to rise. From our point of view, it is very naive to think that inflation will start to fall on its own in a few months. We believe that the fight against inflation will take at least a year and a half, or even two years. Powell admits that inflation may return to the target level in 2024, the year when the rate-cutting cycle will start. However, it is possible that the problem of high inflation will continue for a longer period of time. For the stock market, this means that rates will rise in almost any case by the end of 2022. From July 1, the QT program, which involves reducing the money supply by almost $100 billion each month, will begin. Therefore, we get excellent ground for indices and equities to continue their decline, which is now referred to as a global correction.