Global equities had a strong session yesterday; most European and US indices gained, leaving many investors wondering though, why the market is pushing higher while the recession talks are surging.
The most plausible explanation is the good old ‘bad news is good news’ rhetoric: prospects for global growth slowed to an extent to allow the Federal Reserve (Fed) doves show up their nose again
However, two Fed members said yesterday that they would back a 75bp hike in next FOMC meeting, but dismissed the economic downturn fears (?!)
The S&P500 rebounded 1.5%, as Nasdaq rallied more than 2%. The 2-10-year portion of the US yield curve remained inverted, however, and the volatility remains relatively high, meaning that gains could reverse anytime.
Today, the US will reveal the latest jobs data. For more than a year, the inflation data stole the spotlight to the jobs data and drove the Fed expectations. And as the number of job openings remain above 11 million jobs, there is reason to think that if people want to get a job, they could get one. Therefore, the jobs data will certainly not be decisive in Fed’s decision process for the near future.
But, with the recession talk taking the center stage, investors are increasingly focused on the jobs figures. The US economy is expected to have added more than 250’000 jobs in June, which is a strong number for pre-pandemic times, and the unemployment rate is seen stable at 3.6%.
A strong read could bring forward two ideas. 1: The idea that the US economy could soft-land despite the tighter Fed policy, or 2. the idea that the Fed would allow itself to get more aggressive to fight inflation.
A meaningfully lower than expected NFP read, on the other hand, could confirm that 1. the slowdown began, and the jobs market may not be rate-hike-proof, or 2. the Fed could soften its tone if it concludes that the economy is not strong enough to shoulder back-to-back big rate hikes, after all.
In both cases, there is a large room for market interpretation; it’s difficult to predict what direction the market would take.
We will, however, see whether Jerome Powell, who believes that the US jobs market remains strong enough to withstand the rising rates, is right, or is he again falling behind the curve.
Euro meltdown
The US dollar index consolidates at 20-year high levels and continues pressuring its G10 and EM peers lower. The EURUSD slipped to 1.0150, as the euro bears remain in charge of the market despite the hawkish European Central Bank (ECB) minutes.
The minutes showed that “there was agreement that gradualism should not necessarily be interpreted as slow action in small steps’. It’s objectively non-sense. But, what we retain from the ECB minutes yesterday is that, there could eventually be a 50bp hike at this month’s meeting and that the central bankers’ brains are fuming.
It is likely that the euro bears continue pushing for a further fall to parity against the greenback until we see the colour of the 50bp hike, as a bigger than expected ECB hike should also come hand in hand with a convincing antifragmentation tool. But the antifragmentation tool could see political and legal constraints. And the disbelief that the ECB is able to come up with something to avoid a debt crisis and raise the rates is what will continue keeping the euro under pressure and get the bulls to ignore the hawkish ECB statements.
