When you hear the Merrymen’s hit song ‘Feeling Hot Hot Hot,’ you normally think of partying somewhere tropical, but today it does the job in summing up today’s inflation report. Inflation remains scorching hot. US inflation accelerated more than economists were thinking, rising to 9.1% YoY, which is a 40-year high. On a monthly basis, headline inflation rose 1.3%, the largest increase since 2005.

The US consumer activity is weakening as real hourly earnings are sharply declining. Food prices are rising at a slower pace than the prior month. Rents surged as expected, which should keep the pressure on the Fed to tighten aggressively as their rate hikes will have the most impact on housing inflation. ​ ​ ​

It is hard to be a buyer of stocks as the risks of the Fed sending this economy into recession continue to grow. Wall Street isn’t expecting a severe recession, so the downward pressure on stocks might be limited to another 5-10%. ​Rate hike expectations are now locked in at 75 basis points for later this month, but a strong case could be made for a full-point increase.

BOC Delivers 100bp Hike

The Bank of Canada is showing financial markets that they are not messing around with inflation. The BOC raised rates by an entire percentage point, and overnight swaps suggest the benchmark rate will rise to 3.75% by the end of the year. ​ Aggressive tightening will have the BOC leading the interest rate differential against the wrath of currencies, which should provide some underlying support for the loonie. ​Despite the recent weakness with crude, the Canadian dollar looks like it could be positioned for a decent rally over the next few weeks.

Bitcoin is holding above the 19000 level as traders digest a very hot inflation report and shift Fed rate hike and cut expectations. ​The Fed might need to consider a full point rate hike at the end of the month, and they could be eyeing rate cuts at some point next year. Bitcoin remains a risky asset that could benefit from a Wall Street that is confident they have fully priced in Fed tightening. The Fed may become a little more aggressive with rate hikes over the July and September meeting, but they could be shifting to a slower pace in November.

Bitcoin is stabilizing, but sellers are eagerly watching to see if the June lows will hold. ​ ​

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