Stock Market Braces For Fed Pain (Report Premium Edition)

S&P 500 8-29

This week saw more losses in the financial markets as fears over central banks’ monetary policy and a faltering global economy resurfaced.

As the Fed chairman reiterated that monetary tightening would continue in the coming months to limit inflation, despite the fact that US growth is anticipated decline, Jerome Powell’s comments at the Jackson Hole symposium provoked turbulence.

US stocks last week were fluctuating. Major averages moved up somewhat on Wednesday and Thursday after beginning the five-day period in the negative.

Fed and Inflation

After that, on Friday, markets fell after Fed Chairman Jerome Powell declared that the government would “use our tools decisively” to combat inflation, which is still running at a four-decade high.

Indicating that battling inflation is more crucial than promoting growth through an accommodating monetary policy, Powell further stated that raising rates will cause “some harm” to the US economy.

Not just stocks responded to the news; other asset classes also did. As traders considered his remarks, Bitcoin and other cryptocurrencies decreased.

The Fed is still not persuaded that inflation has reached its peak. As a result, it doesn’t anticipate ever ceasing its rate increases. Powell is careful not to stop raising interest rates too soon, adding, “We must keep at it until the job is done.”

According to Truflation (which tracks inflation in real-time), it appears to be down, but not too early to determine a downward trend.

The Fed viewed July’s inflation figures as encouraging evidence that the rate of acceleration is decreasing and that the interest rate increases. A strong dollar policy (compared to other currencies) positively impacts this trend.

The actual risk still lies in the Fed’s limited ability to reduce inflation, making the Fed’s target inflation rate of 2 percent, not just an impossibility but also one that won’t be reached for a very long time.

A huge factor in inflation is the government budget. Former president Barrack Obama’s economic council chairman Jason Furman stated Wednesday that the student debt forgiveness program is projected to increase inflation by 0.2-0.3 percent.

The hundreds of billions of dollars in increased government spending under the Inflation Reduction Act could also be inflationary.

Government spending was the primary driver of the Great Inflation, which lasted from 1968 to 1982, to restate one of my central claims from the previous 18 months.

Even though experts were aware that both the Vietnam War and the Great Society contributed significantly to inflation, President Lyndon Baines Johnson’s administration was unwilling to reduce these expenditures (Biden’s Build Back Better). The Biden administration is imitating LBJ’s errors.

Conclusion: Fed’s Pain Decision

The Fed will have to choose between decreasing rates to promote economic development or fighting inflation as Paul Volcker did in the 1980s, which led to the historic double-dip recession, as long as it keeps raising interest rates. A change in the Fed’s approach in this area, known as the “Fed pivot,” will cause inflation.

Economic Data

The University of Michigan consumer mood index performed better than predicted in terms of the economy. The final number for August, 58.2, easily exceeded expectations of 55.3 and was higher than the result for July, 51.5. The lowest rating in eight months, year-ahead inflation forecasts dropped from 5.2 percent in July to 4.8 percent.

The US labor market will be the focus of attention this coming week. If July’s excellent performance were a one-off or indicative of a larger trend, data due on Friday would reveal. Recall that nonfarm payrolls rose by 528,000 last month, exceeding predictions of 290,000.

The Dow fell 4.22 percent for the entire week. The Nasdaq Composite dropped 4.44 percent, while the S&P 500 fell by 4.04 percent.

September-October Crash?

Germany will announce its early August inflation rate on Tuesday, and France and the Eurozone will be in the limelight the next day.

Updates on consumer confidence, construction expenditure, and vehicle sales are just a few of the economic indicators expected this week before the big August jobs report arrives at the end of the week. The August U.S. jobs report is anticipated to show 300K monthly job additions and a stable unemployment rate of 3.5 percent.

The headliner earnings reports on the corporate calendar are from Lululemon (LULU), HP Inc. (NYSE: HPQ), and Broadcom (NASDAQ: AVGO), while a strategy update from Bed Bath & Beyond (NASDAQ: BBBY) also stands a high possibility of moving the stock price.

No, there isn’t a central bank line this week; you’re not dreaming. But don’t worry, some Fed members will keep talking in the coming days.

Key Events & Calendar

  • Tuesday, August 30 – JOLTS Job Openings (July)
  • Thursday, September 1 – ISM Manufacturing PMI (Aug)
  • Friday, September 2——JOBS Report

Germany will announce its early August inflation rate on Tuesday, and France and the Eurozone will be in the limelight the next day.

Updates on consumer confidence, construction expenditure, and vehicle sales are just a few of the economic indicators expected this week before the big August jobs report arrives at the end of the week.

The August U.S. jobs report is anticipated to show 300K monthly job additions and a stable unemployment rate of 3.5 percent. I continue to think the Fed wants to see a 5% number before they stop raising rates. A sudden increase could cause a dovish Fed, while an expected rate or decrease will cause a hawkish Fed.

The headliner earnings reports on the corporate calendar are from Lululemon (LULU), HP Inc. (NYSE: HPQ), and Broadcom (NASDAQ: AVGO), while a strategy update from Bed Bath & Beyond (NASDAQ: BBBY) also stands a high possibility of moving the stock price.

No, there isn’t a central bank line this week; you’re not dreaming. But don’t worry, some Fed members will keep talking in the coming days.

RATES

The yield curve remains inverted in the US, with 10-year debt paying 3.02 percent compared to six-month debt earning 3.20 percent. A prolonged period of economic stagnation is feared if interest rates stay high for longer than anticipated, as Powell suggested in Jackson Hole. Germany’s bund yields 1.38 percent, France’s OAT yields 2.01 percent, and Italy’s BTP yields 3.68 percent.

COMMODITIES

OIL

Oil prices have fluctuated up and down due to OPEC’s statements laying the groundwork for a prospective production cut as well as the development of the Iran nuclear deal negotiations. Since they directly influence the direction of the world supply, it is evident that these two catalysts are being attentively observed.

WTI, the US benchmark, is currently trading at USD 93 per barrel, while Brent is trading close to USD 100. The difference between WTI and Brent encourages the export of both crude oil and oil products from the US. The demand for natural gas in Europe, where the Dutch TTF has hit a new high of EUR 320/MWh, is not decreasing.

GOLD & PRECIOUS METALS

Industrial metal prices rose this week, except for lead, whose price dropped to USD 1976 per ton this week. Copper is currently trading at about USD 8150 on the LME. The latest monthly data from the International Copper Study Group (ICSG) shows that between May and June, the copper shortfall expanded from 34,000 to 66,000 tons. Gold’s price has plateaued and is now hovering at $1,750 per ounce.

CRYPTOCURRENCY

Bitcoin’s decline from last week has continued, falling more than 3% since Monday and circling at $21,000 as of this writing. In a macroeconomic environment that is still tense, particularly one that is being controlled by central banks and their struggle against hyperinflation, risky assets are still quite vulnerable to macroeconomic statements. Because of this, institutional, expert, and individual investors are reluctant to reinvest in the unstable digital asset market.

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