The stock market jumped up again on Friday after positive economic news. Like many of you, I thought the “good news” would mean that the Fed would more likely continue to raise rates.
The Fed raising rates would theoretically be bad for the stock market and real estate. However, the market appears to be turning bullish.
Looking at the S&P 500, you can see that there is now a strong bull trend in the longer-term bear trend.
In recent weeks, there have been several macroeconomic highlights, with various fiscal policy decisions from the European Central Bank, Bank of Canada, and Bank of Japan, as well as other indicators.
As a result, there have been misfires in the economic dynamic without a collapse, and now investors are witnessing initial cracks as central banks continue hiking interest rates.
Inflation appears to be dropping but it still has a far way to go. The current YoY rate on Truflation is 7.58%.
This situation caused stocks to surge strongly at the start of this week, but it was countered by the decline of American technology giants following a string of disappointing earnings.
Turning to the Fed…
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Dangers of enhanced tightening
As the effects of earlier rate increases are felt throughout the economy, Federal Reserve officials have warned about the threat of overtightening. For instance, this week, San Francisco Fed Bank’s President Mary Daly emphasized the central bank’s precarious position, noting that it is at risk of either overtightening, which would cause a severe recession, or under-tightening, which would increase inflation.
Daly also discussed the likelihood that the Federal Reserve will begin to scale back further rate rises to 25 or 50 basis points from 75 basis points. Traders and investment managers have repeatedly warned that raising rates by 75 basis points will wreck the United States economy and compel the Fed to change course. Fed officials share the same sentiments, especially should they lower subsequent hikes to the Federal Funds Rate.
A Fed pivot may induce a turnaround in the dollar’s strength and increase inflation. However, a Fed pivot is unlikely to happen unless there is something like a financial crisis. The Fed may decide to scale back its rate increases in the future if it anticipates a recession.
According to Goldman Sachs analysts, the US economy is far from a recession, as reflected in the latest Gross Domestic Product (GDP) data. In the third quarter, the US economy witnessed a 2.6% growth. In recent weeks investment banks have been predicting that the US economy will resume growth.
Massive trade imbalances, which slowed GDP growth, contributed to the weakness underlying the “technical recession.” In the last quarter, trade deficits decreased, leading to a rebound in GDP. With the effects of the interest rate increase continuing to affect the economy, the biggest recession risk is likely to come in 2023.
Additionally, several geopolitical issues are anticipated over the coming year, such as renewed tension between Ukraine and Russia, a Taiwan-China conflict, a war between Iran and Israel, a new trade conflict with China, and a possible conflict between South and North Korea.
These geopolitical issues could cause trade and financial shocks, triggering a global economic downturn. However, Goldman Sachs analysts are still determining whether the Federal Reserve will trigger a recession in a bid to combat inflation.
KEY EVENTS & CALENDAR
- Wednesday, November 2 – Fed Interest Rate Decision
- Friday, November 4 – Unemployment Rate (October)
- Earnings Reports
- US Elections
The next two weeks will be critical for equity markets. First, the Fed is expected to reveal a new fiscal policy decision and provide commentary on the current situation.
Investors are optimistic that the central bank boss Jerome Powell will have a change of mind.
In addition to October’s jobs data, the PMI, factory orders, construction spending, and factory orders data are all due to come out before the weekend.
The mid-term elections are expected on November 8. Right now the US House is expected to be won by the Republicans, while the Senate is a toss-up leaning Republican.
The 10-year T-Bond yield fell to around 4% due to investors’ optimism on a less interventionist Fed. The market is concerned that the US recession will recur, and it believes that the trend of rate hikes is nearing an end because all short maturities now are better yielding.
In addition, the 75 basis point fiscal contraction that the ECB revealed on Thursday was anticipated in Europe. However, bond rates remained high compared to 4.19% in Italy and 2.11% in Germany over ten years. In contrast, British Gilts fell to 3.47% following Rishi Sunak’s assumption as UK PM.
The oil market sentiment has improved. According to traders, the acceleration of Chinese oil imports and the changes in the US GDP in Q3, which was up 2.6%, beating the consensus of 2.3%, is good news. Due to an increase in gas and oil prices, energy firms have reported outstanding returns. While US WTI is trading at $88 per barrel, North Sea Brent is trading at $ 94. Because of the mild weather in Europe, the European benchmark for natural gas, the Dutch TTF, is continuing to fall and is currently trading at 113 EUR/MWh.
GOLD & PRECIOUS METALS
A ton of aluminum is now selling for 2300 dollars in London, where the price has increased. According to China’s National Bureau of Statistics’ latest report, the output of refined copper rose 5.8% from the previous year in September.
In the crypto sector, there was some optimism this week after Bitcoin recovered almost 5% to trade at around $20,500 as of press time. On the other hand, Ether has climbed nearly 16% since Monday, a sign that risk appetite is back in the sector. The renewed confidence is in line with expectations that, in the coming months, central banks will support risky assets.