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Global markets have seemingly run out of puff this week, and central banks are not helping as they remain collectively inflation vigilant. US stocks traded lower on Wednesday as Fed Chair Powell's scheduled Congressional testimony was greeted with a frosty reception by most stock market participants.

Rising rates and hints of multiple hikes on the horizon are weighing on longer-duration assets like Tech and Communication Services on Wednesday as Fed Chair Powell sticks to the more hawkish tone that emerged during last week's FOMC meeting.

The Fed has been progressing in combating stubbornly high inflation born from the pandemic demand for products and simultaneous supply chain bottlenecks. Still, the slow decline of core inflation has been disappointing in the Federal Reserves Board's eyes and one reason for the hawkish shift in tone. And while the underlying conditions required to bring inflation back to target are coming together as the labor market loosens and the supply side recovers, lowering inflation to 2% is likely to take a while. Indeed, the final leg of the journey might prove the toughest.

Progress on inflation is being made, and further declines are likely to be seen at a lag -- one of the potential motivations for pausing at the recent June meeting -- which is also supportive of the Fed slowing the pace of rate hikes where the Fed could guide markets to an every-other-meeting pace.

Before breaking fresh higher ground, investors may need to see positive convergence in the wide disparity between the Federal Reserve and the Market's forward inflation expectations. In other words, the Markets and Federal Reserve are not singing from the same song page regarding the inflation outlook. In fact, the Market anticipates a substantive decline in inflation 1 year ahead of the Fed.
 

Forex

On the surface, a weakening in the dollar in the face of a hawkish Fed seems at odds with historical FX trends, but this is all about the market inflation perception rather than central bank guidance. Last week ECB’s message was clear and concise: the inflation outlook is troubling, rates will be raised in July, and there is no talk of a “pause.” Even though the near-term policy outlook is not that different from the Fed, which also seems very likely to hike in July, the messaging was different, and that matters in FX. As a result, EURUSD is back around 1.10 for the third time this year. So will the third time be the charm for Euro Bulls?
 

Oil

Investors probably shouldn't get too excited about China's growth prospects as there are no quick fixes to the property market or youth unemployment. Still, China may need to import more crude as stimulus starts working through the economy. And amid Saudi Arabia's commitment to providing a price floor by introducing additional cuts of 1 mb/d for July, with the possibility of extending this action beyond July, it does, at minimum, suggest less downside pressure on oil into July.

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