All was going well yesterday; equities were in the green, when suddenly the dark clouds gathered and it started raining in the markets. The biggest catalyzer of yesterday’s sentiment reversal was the stronger-than-expected US economic data, which revived the Federal Reserve (Fed) hawks and sent the equity indices lower.
First, the JOLTS data showed that the job opening in the US spiked above 11 million, reminding investors that the US jobs market remains extremely tight, and there are about two jobs waiting for each unemployed worker. That means that the companies should pay higher salaries to get people to work for them, and well, that has an undesirable positive impact on inflation, hence revives the Fed hawks.
Second, the US consumer confidence index jumped in August, that was higher than the most optimistic of the forecasts on a Reuters survey. Improved confidence also means that households could be tempted to spend more money, which goes against the Fed’s will to cool down demand, and ease inflation. So, the latter also boosted the Fed hawks.
And as a result, the S&P500 slumped more than 1%. The 50-DMA, and the 50% Fibonacci level on the summer rally have been pulled out and the index closed the session below the 4000 psychological mark for the first time in more than a month.
Nasdaq slid another 1%, as well. It also cleared the 50-DMA support to the downside, and pulled out the major 61.8% retracement on the summer rally, signaling a stronger bearish momentum for the tech-heavy Nasdaq index.
For both Nasdaq and the S&P500, the tech indicators don’t point at oversold market conditions, hinting that the selloff has perhaps more to deepen in the next few hours.
Although the US futures are again in the positive this morning, we saw yesterday that the winds could rapidly change direction, and the volatility is picking up.
Due today, the ADP report will be one of the key data that investors will be watching in the US. The US economy is expected to have added 200’000 new private jobs in August. A stronger-than-expected figure has power to boost the Fed hawks – as we saw at yesterday’s session, and increase the bearish pressure on equities. A softer-than-expected figure will, however, do little to bring in the Fed doves, given that the Fed wants a tighter jobs market, and it will only be happy to see the number of job additions cool down.
And sorry to say this but
As long as the jobs market remains tight and inflation remains the predominant concern, the Fed will welcome any further slump in equity prices.
Minneapolis Fed President Kashkari couldn’t be clearer when he said on Bloomberg’s Odd Lots that he was ‘not excited to see the stock market rallying after the last FOMC meeting’ , because he ‘knows how committed they all are to getting inflation down’. And somehow, ‘the markets were misunderstanding that’.
Rising inflation also revives ECB & BoE hawks, in vain…?
The German inflation hit an almost 50-year high of 8.8% yesterday, the Spanish inflation was slightly off but still above the 10% mark. The French and Italian will also release their latest update, and we will get the flash CPI estimate in the Eurozone this morning. The number is expected to be around 9%.
European Central Bank’s (ECB) Muller said yesterday that the ECB should discuss 75 bp hike at the September policy meeting , as inflation outlook has failed to improve.
And he is right. There is more pain before relief in Europe. In Germany, the latest CPI figure was relatively softish thanks to government aid, including fuel rebate, and the measures will end soon. The nat gas prices continue spiking as Russia turns off the Nordstream 1 for three-day maintenance, and we doubt that the gas flow will ever be restored again. On the other hand, Gazprom warned the French utility Engie that it would halt deliveries from Thursday because of a disagreement over payments.
If that’s not enough, the euro keeps weakening against the US dollar, making the European imports more expensive. And the EURUSD is struggling to keep its head above water, as the hawkish ECB expectations are being troubled by the recession fears.
Across the Channel, the situation is not more brilliant. If you think that 10% inflation in Europe is excessive, read this: Goldman Sachs warned that inflation in Britain could hit 22% next year if the natural gas prices remain high. Other big banks are not as pessimistic, but their forecasts are not encouraging either. Citi for example sees the British inflation advance past 18%, while the Bank of England itself sees inflation trend to 13%. The BoE hawks are not sleeping in their corner, but Cable is headed toward the 1.15 mark, despite the expectation that the BoE will more than double its policy rate to 4.25% next year! If that’s not capable of giving some strength to the pound, I don’t know what can!
