Updated: Sep 4, 2022
The rally in the US market has been erased sharply after the Fed announcement of its hawkish stance. Global equity fund and global bond fund had outflows of $4.9 billion and $4.2 billion respectively. Economists are predicting new highs in yields and new lows in stocks.
Eurozone Inflation: CPI inflation in the eurozone rose to 9.1% in August, slightly higher than expectation. The increase in food and core prices offset some of the relief from energy prices. This created a tougher scene for the ECB meeting in the coming week as the market is still anticipating between a 50bps and 75bps hike.
SPR: The Strategic Petroleum Reserve (SPR) has fallen to its lowest level for 38 years as US government keeps using it to ease the pump in oil prices. The stockpile has dropped below 450 million barrels, and 1 million barrels were released on a daily basis over the last 6 months. Whether this short-term fix is sustainable is still in doubt.
Surprising Economic Data: US jobs opening and consumer confidence are reported positively on Tuesday. Both surprise strengths in economic data point to solid labor demand and resilient household demand. Investors interpreted it as a reassurance toward a third 75 basis point hike in September as it allows US central bankers to step harder on the monetary policy brakes.
Surging Fuel Prices: Fuel prices for aviation spike up more than twice as fast as oil. The holiday season and revenge traveling are boosting the demand, while Russia’s gas control is contributing to the lower supply. The number of seats provided by airlines dropped due to the shortage of staff, leading to more flight cancellations and higher ticket prices. The seat capacity level is 14% less than in 2019.
Job Market: The weekly jobless claims dropped to the lowest level in 2 months. Employers are not rushing to lay off given a potential recession may slow down the economy. Nonfarm payroll was reported slightly above consensus, led by retail, healthcare, education, professional and business services.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Goldman Sachs: It is essential to recognize the vulnerability of the market and build downside protections in advance. Funding costs can ramp up rapidly due to higher counterparty risk and a jump in demand for liquidity during times of distress. Investors should be cautious about exposures that are sensitive to liquidity changes or unfavorable convexity in payoffs.
J.P Morgan: As Fed is prioritizing inflation control over economic growth, it would favor international equities over US equities and value stocks over growth stocks. Duration can be added back to the portfolios as economic growth is expected to slow, implying lower rates.
Bank of America: A consolidation is expected in equities. For asset allocation, we are neutral on equities, and investors are suggested to add risk later in the year. There will be more opportunities in equities in the hiking cycle when the expectation of earnings is more reasonable.
HSBC: US treasury curve was slightly flattening given the strengthened rate hike expectation supported by above-expectation consumer confidence and job openings. Month-end rebalancing also provided support for the longer end. 2Y yield rose, 10Y yield was flat and 30Y yield dropped slightly.
Goldman Sachs: US manufacturing PMI missed expectations, showing that business activities contracted, especially in the private sector. The composite flash PMI in the eurozone was slightly above expectation, indicating a declining momentum of services and subdued manufacturing activity.
J.P. Morgan: Declining gasoline prices and airline fares are providing relief to the CPI report in August, while the rest of the year is still uncertain due to natural gas prices climbing and higher wages adding a floor underneath inflation. Based on our CPI forecast, even in the best-case scenario, it would take 12 months for Fed to achieve the inflation target of 2%.
Citi: Data showed reacceleration of economic activities and the labor market remains tight. Core inflation is expected to be weighed down by used cars.
Citi: Dollar index remains attractive stemming from the longer high rates environment, tighter liquidity conditions, and the rising probability of recession. The slower recovery in China and depressed euro bloc are also making the dollar index more difficult to beat.
Bank of America: Upward pressure on the dollar remains as more liquidity of the dollar is being removed from the global financial system due to quantitative tightening. Geopolitical backdrop favors the growth expectation in the US compared to the other developed markets like Europe, which contribute to dollar strength.
Bank of America: Emerging markets are having a hard time due to the higher commodity prices, including energy and food. The strong dollar is pushing commodity prices even further, making goods more expensive to the rest of the world.
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