This is my edit of the monthly economic chat with Nuggets News, as we explore the latest from the markets, and do a deep dive on the Australian economy after the RBA decision and The Budget!
See Nuggets version at: https://www.youtube.com/watch?v=wQgQEpRnezI
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Another wild week on the markets, driven by conflicting data, and a reactive FED, who has effectively given up on forward guidance, and who does not know where rates will go. But despite Powell’s protests to the contrary, some are suggesting Central Bankers are being swayed by political considerations from driving rates higher to quash inflation.
Apart from more strong big tech results this week, two events shaped the week. It started with fears of higher rates and inflation, driven by hot economic data, but turned after the FED held rates, and ruled out rate hikes, waiting for more data. Stubbornly high readings on inflation this year pushed Federal Reserve Chair Jerome Powell to say on Wednesday that it will likely take “longer than previously expected” to get enough confidence about inflation to cut interest rates.
But then in a “bad news is good news” swing, the Friday jobs report came is softer than expected in April, a sign that persistently high interest rates may be starting to take a bigger toll on the world’s largest economy.
In Australia the benchmark S&P/ASX 200 rose 0.55 per cent, to 7629 points to finish the week 0.7 per cent higher. The central bank on Tuesday is widely expected to keep the cash rate at a 12-year high of 4.35 per cent, but it may also reintroduce a soft tightening bias following last week’s hotter-than-expected inflation report.
But at the end of another volatile and rudderless week, markets remain on edge, waiting for the next big shiny bit of news – of course big players benefit from these changes in sentiment, but ordinary investors will be perhaps rightly more cautious. Expect more rapid changes in trajectory in the weeks ahead, as data will continue to confuse. Meantime, the credibility of Central Bankers continues in my eyes to diminish, even as more ordinary households are being crushed. And more on that subject in my live stream on Tuesday.
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This week will I think mark a critical turning point across markets, as the higher for longer mantra finally took root on sticky inflation fears, geo-political tensions flared and the first flush of 1Q US results highlighted pressures on earnings ahead. All this drove a flight to the safest corners of the market such as bonds and the dollar while equities fell. Oil rallied but Wall Street’s “fear gauge” – the VIX – spiked to levels last seen in October with a surge of 16 per cent.
It’s hard to unpick the prime reasons for the falls, but US Equities had their worst day since January. The report that Israel was bracing for an attack by Iran on government targets certainly did not help. US President Joe Biden said he expects Iran will attack Israel sooner rather than later – and his message to Iran is “don’t” do it. A direct confrontation between Israel and Iran would mean a significant escalation of the Middle East conflict and would lead to a significant rise in oil prices, according to Commerzbank.
Escalating geopolitical tensions, also including attacks on Russian energy infrastructure by Ukraine, have spurred bullish activity in the oil options market. There’s been elevated buying of call options – which profit when prices rise – in recent days, with implied volatility jumping.
Also, Investors have pushed back their expectations for the start of the Fed’s easing cycle as March nonfarm payrolls crushed expectations and US inflation climbed to 3.5%, up from 3.2% and above the forecast of 3.4%. The markets have lowered the odds of a June cut to just 24%, compared to 54% a week ago. A September cut was priced in at 91% a week ago but that has dropped to 72%, according to the CME FedWatch tool.
Fed members are sounding hawkish and the markets have slashed rate cut expectations. Fed Bank of Boston President Susan Collins reiterated she sees no urgency to cut rates in the near term, given elevated inflation and the resilience of the labor market. Her Chicago counterpart Austan Goolsbee repeated that housing inflation will need to come down in order for overall prices to cool to the central bank’s target.
Meantime banks’ results offered the latest window into how the US economy is faring amid an interest-rate trajectory muddied by persistent inflation as JPMorgan Chase and Wells Fargo both reported net interest income that missed estimates amid increasing funding costs. Citigroup’s profit topped forecasts as corporations tapped markets for financing and consumers leaned on credit cards – signs that a prolonged period of elevated interest rates will benefit large lenders.
“Many economic indicators continue to be favourable. However, looking ahead, we remain alert to a number of significant uncertain forces,” JPMorgan’s chief executive Jamie Dimon said. He cited the wars, growing geopolitical tensions, persistent inflationary pressures and the effects of quantitative tightening.
And the latest economic data did little to alter the reduced risk. The Michigan consumer sentiment index fell to 77.9 in April from 79.4 a month earlier, missing forecasts of 79.0 and the data also showed that the 1-year inflation expectations and 5-year expectations rose to 3.1% and 3% respectively, piling on worries about higher for longer interest rates.
So all up, MSCI’s gauge of stocks across the globe was last down 1.2%, its biggest one-day drop in about six months, dragged down by U.S. performance. Wall Street’s main indexes all slumped well over 1% with the S&P 500 posting its biggest one-day drop since Jan. 31. The Dow Jones Industrial Average fell 1.24%, to 37,983.24, the S&P 500 lost 1.46%, to 5,123.41 and the Nasdaq Composite lost 1.62%, to 16,175.09.
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Last Wednesday, Fed Chair Jerome Powell retained a cautious stance towards future rate cuts in a speech to the Stanford Graduate School of Business. “Recent readings on both job gains and inflation have come in higher than expected,” he said, suggesting that the U.S. central bank will continue to study more data before starting a rate-cutting cycle.
Atlanta Fed President Raphael Bostic, a known hawk, said rates should likely not be reduced until the fourth quarter of this year, with only one cut likely in 2024. “We’ve seen inflation kind of become much and more bumpy,” Bostic said. “If the economy evolves as I expect, and that’s going to be seeing continued robustness in GDP and employment, and a slow decline in inflation over the course of the year, I think it will be appropriate for us to start moving down at the end of this year, the fourth quarter.” But on Thursday, Minneapolis Fed President Neel Kashkari said rate cuts might not be required this year.
Then we got data on Friday showing US payrolls rose in March by the most in nearly a year and the unemployment rate dropped, pointing to a strong labor market that’s powering the economy. Nonfarm payrolls advanced 303,000 last month following a combined 22,000 upward revision to job gains in the prior two months. The unemployment rate fell to 3.8%, with more people joining the workforce and able to find a job as participation rose.
Some are now seriously asking whether rates are high enough to quash inflation. A rate hike would really change the market dynamics. That said, Alice In Wonderland like, many analysts still seem to be wired into a rate cut soon.
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Digital Finance Analytics (DFA) Blog
Could The Bumps In The Road Turn To Potholes And Rate Rises Ahead?
This is an edited version of a live discussion with Head of Investments at Walk The World Funds and Nucleus Wealth, Damien Klassen for our regular monthly look at what is going on across the markets, as many are reaching new highs, even as company returns are in question, and inflation is looking more sticky. Is a stock correction likely, and what does all this means for bonds and other asset classes?
Go to the Walk The World Universe at https://walktheworld.com.au/
Digital Finance Analytics (DFA) Blog
DFA Live Q&A HD Replay: Investing Now: With Damien Klassen
In a foreshortened trading week, the Dow and S&P 500 closed at new record highs on Thursday, notching its best first-quarter performance since 2009 supported by the AI boom and as the rally broadened out beyond tech amid optimism on rate cuts coming soon and data signaling a soft landing for the US economy remains within in reach. MSCI’s gauge of stocks across the globe fell very slightly. The index was up over 7% for the first quarter.
The S&P 500 benchmark index closed up 0.1 per cent to 5254.35; having touched an intraday high of 5264.85 midafternoon. The Dow advanced 0.1 per cent, losing early momentum for a run at 40,000. The Nasdaq Composite slipped 0.12 per cent.
But additional data including the core PCE inflation metric, the Federal Reserve’s preferred price measure came out on Holiday Friday. The so-called core personal consumption expenditures price index, which strips out the volatile food and energy components, increased 0.3% from the prior month, data out Friday showed. That followed a 0.5% reading in January, marking the biggest back-to-back gain in a year. Fourth-quarter core PCE inflation was revised slightly lower. The measure is up 2.8% from a year earlier, still above the Fed’s 2% target.
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Digital Finance Analytics (DFA) Blog
The FED Speaks After The Bell, As Inflation Holds Higher!
This is an edited version of a live discussion about the current state of the markets as I was joined by Damien Klassen, Head of Investments at Nucleus Wealth and Walk The World Funds.
Given the rise of AI related stocks, while the broader markets go sideways, and Central Banks keep rates higher for longer, how will this play out ahead, and what does it mean for investment strategies?
The original stream, with chat is here: https://youtube.com/live/z_BA6DeJJnY
Go to the Walk The World Universe at https://walktheworld.com.au/
Digital Finance Analytics (DFA) Blog
DFA Live Q&A Replay: Investing Now: With Damien Klassen
In our weekly market update once again, the Nasdaq Composite and S&P 500 reset their record intraday and closing highs as tech shares continued to lure investors enthused over the potential impact of artificial intelligence across the economy. And MSCI’s gauge of stocks across the globe rose 0.76%, to 767.09 and hit a record high, as the AI love-in continues.
So again, we see the market backing AI, while choosing to ignore some of the less positive data signals, and so you have to simply ask the question, will this end well? Some of us are old enough to remember the dot-com bubble!
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This is an edited version of a live discussion about the current state of play of crypto as it becomes morphed by major financial services players thanks to spot EFT’s and other developments. I am joined by Adam Stokes who says those who don’t understand crypto, don’t understand money. Those who don’t understand money, are destined to be a slave to it.
This is our weekly market update covering the US, Europe, Asia and Australia plus gold, oil and bitcoin.
This was another volatile week on the markets, as traders played the volatility card and as U.S. stocks fell on Friday with the Nasdaq showing the largest decline after a hotter-than-expected producer prices report eroded hopes for imminent interest rate cuts by the Federal Reserve. Higher for longer.
Earlier this week, a hot consumer prices report sparked a selloff in equity markets as Tuesday’s latest US Consumer Price Index inflation report for January showed both headline and core prices in both monthly and annual terms climbed faster than economists’ forecasts. The former rose 3.1% year-over-year last month, hotter than the +2.9% expected. That makes it harder for the Fed to cut rates. Then later a slump in January retail sales on Thursday stoked hopes of rate cuts.
Fridays producer price index for final demand rose 0.3% last month after declining by a revised 0.1% in December, the Labor Department’s Bureau of Labor Statistics said.
Higher for longer was reinforced by Atlanta Fed President Raphael Bostic who said he needed more evidence inflation pressures are easing, but is open to lowering rates at some point in the next few months and San Francisco Fed President Mary Daly said “there is more work to do” to ensure stable prices, despite remarkable progress.
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