Stocks in the United States sank dramatically on Friday, pulled down by concerns about rising interest rates. Investors in the United States and abroad are anxious that the Federal Reserve’s aggressive approach to controlling inflation would result in a full-fledged recession.
The major averages all had their fifth negative week in a row, with the Dow losing 4%. The S&P 500 and Nasdaq fell 4.65 percent and 5.07 percent, respectively. The Dow set a new 2022 low and fell below 30,000 for the first time since June 17.
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Hard Landing Ahead
The Federal Reserve is striving to keep inflation in the sweet spot, not too high and not too low. But as a history of causing recessions when it tries to raise rates.
The Fed raised interest rates by 75 basis points last Wednesday and signaled that another move is anticipated in November. As a result, bond yields increased, prompting 10-year and 2-year Treasury rates to reach a decade-high.
Last week’s Federal Open Market Committee (FOMC) address, Federal Reserve Chairman Jerome Powell verified a handful of my major expectations. He made a case for additional suffering and a long winter by promising to keep raising interest rates into next year.
The Fed now expects unemployment to rise through 2024 and the US economy to expand at less than 2% annually through 2025.
This is undoubtedly a best-case scenario, as Powell recognized Wednesday that “a smooth landing is really difficult” and that those modest possibilities drop if the Fed needs to be more restrictive.
Major institutions are now revising their projections for the fourth quarter of 2022. Goldman Sachs, for example, reduced its year-end S&P 500 objective and forecasted at least a 4% drop from here.
Last Market Week’s Drop
The consumer discretionary sector of the S&P 500 fell along with energy-related names. Major technology firms, which are typically considered growth equities, also declined. This includes well-known brands like Apple, Amazon, Microsoft, and Meta Platforms. To me, this is just another indicator of a slowing economy.
On the economic front, the Flash US PMI Composite Output Index fell to 49.3, which is in the contraction zone but is better than the previous month’s reading of 44.6.
The British pound fell to a three-decade low against the US dollar in foreign exchange markets after a tax cut plan in the UK sent shockwaves through the markets.
Coming Unemployment & Depression 2023
Yesterday, the Federal Reserve made history by authorizing a third consecutive 75-basis-point raise in an aggressive bid to combat the US economy’s white-hot inflation.
The massive increase, unthinkable to markets just months ago, brings the central bank’s benchmark lending rate to a new target range of 3% -3.25 %. This is the highest fed funds rate since the 2008 global financial crisis.
The Fed’s decision on Wednesday is the Fed’s most significant policy measure to combat inflation since the 1980s. It would also certainly inflict economic hardship for millions of American companies and people by increasing the cost of borrowing items such as houses, vehicles, and credit cards.
Powell said as much yesterday: “We’ve probably in the housing market got to go through a correction to get back” to “reasonable” prices.
Powell went on to say that home prices and rent would remain elevated. These are not exactly words of encouragement, especially when they come from the man whose job it is to ensure stable prices and maximum employment.
To recap, we don’t have stable prices, and Powell is about to wreck the stock market, increase unemployment, and real estate to slow inflation. This will most likely lead to a depression in 2023.
KEY EVENTS & CALENDAR
- Tuesday, September 27 – Core Durable Goods Orders (MoM) (August)
- Wednesday, September 28 – Pending Home Sales (MoM) (August)
- Fed Talk (All Week!!!)
- Iran Protests
- Russia Ukraine War – Peace or Nukes?
According to our observations, every day this week will have at least one central banker speech. If they begin to drive you, you should avoid the media for a few days.
There will also be some key indicators in the United States, such as Durable Goods Orders and Consumer Confidence (Tuesday) and PCE inflation (Friday).
In Europe, the German business climate (Monday) will be released before the first estimate of September inflation on Friday.
Twitter (TWTR) will depose Elon Musk, Intel (NASDAQ: INTC) will host an important innovation event, Amazon (AMZN) will unveil new goods, and Tesla (NASDAQ: TSLA) will hold its highly anticipated AI Day in Palo Alto, California.
We are keeping an eye on the protests in Iran as it could lead to affect the energy markets.
It appears Russia is setting up to ramp up more in the war against Ukraine, but it may be a ploy to set up a stronger position for peace. If Russia uses nukes as they have threatened, it will cause a huge ripple in the markets. However, if some kind of peace agreement is reached, expect energy prices to crash.
The Fed’s decision has breached the bond market’s final dam. The 10-year US government notes yield increased from 3.47 percent last week to 3.77 percent on Friday. The yield curve remains inverted, with a 2-year maturity yielding 4.24 percent. In Europe, the tendency is similar, with more pronounced growth among less qualitative issuers. Over ten years, Swiss paper yields 1.37 percent, German Bund yields 2.04 percent, French OAT yields 2.62 percent, and Italian BTP yields 4.31 percent. The British Gilt is yielding 3.76 percent.
Monetary tightening by the Fed and other central banks is putting pressure on risk assets like oil. Traders continue to regard the glass as half empty, worrying about the effects of widespread monetary tightening on demand. In this scenario, the Kremlin’s planned referendums to annex four Ukrainian areas and the mobilization of 300,000 reservists take a back seat.
According to reports, the EU is preparing new penalties against Moscow, including a price ceiling on Russian oil. However, due to the positions of some nations, such as Hungary, establishing an agreement may prove challenging. North Sea Brent is trading around USD 89 per barrel, while US WTI is selling at a USD 7 discount at USD 82 per barrel.
GOLD & PRECIOUS METALS
With the exception of nickel and tin, which stabilized at USD 24560 and USD 21650, the strong dollar weighed on the industrial metals section. Rio Tinto’s outlook also dragged on market mood, as the mining company anticipates a “difficult” environment for copper in the short term due to surging prices, which may affect metals demand. Finally, zinc stocks at LME facilities fell further to their lowest level since February 2020. Gold is exhibiting some resistance and is consolidating around USD 1670 on the precious metals front.
Cryptocurrencies, like the rest of the financial markets, are under pressure. Bitcoin is trading for less than USD 19,000 per unit (-9% in one month), while Ether is trading at around USD 1290. (-18 percent in one month).