Market Briefing - Post-Fed Rally Loses Steam
Markets surged yesterday after Federal Reserve Chair Jerome Powell said, “we are now at levels broadly in line with our estimates of neutral interest rates, and after front-loading our hiking cycle until now we will be much more data dependent going forward”. Because “neutral rate” refers to a theoretical rate of interest at which the economy runs at its potential without overheating or cooling down too quickly, investors interpreted his comments to mean that the central bank would slow its tightening cycle into the autumn months.
We would question the rally’s sustainability. In other comments, Mr. Powell warned another “unusually large” move at the September meeting is “certainly possible” if inflation hasn’t retreated, and said projections delivered in June remained representative of the Fed’s thinking. At the time, officials expected rates to hit 3.4 percent by year-end and 3.8 percent by December 2023 - well above current market expectations. More fundamentally, the central bank is explicitly aiming to bring financial conditions into restrictive territory, and the market reaction thus far has gone in the opposite direction. A more hawkish communications effort could unfold over the seven weeks between now and the September meeting.
Weak earnings from Meta, the parent company of Facebook, dampened risk appetite overnight, undoing some of yesterday’s gains. Futures on US equity markets are pointing to a slightly weaker open and the dollar‘s losses are reversing. Global crude benchmarks are up roughly 2 percent after the Energy Information Administration said US crude inventories fell by 4.5 million barrels for the week ended July 22.
The euro is falling ahead of a series of reports that are likely to show growth slowing in the second quarter and prices rising 8.6 percent year-over-year in July. The pound is catching a slight bid as the absence of any major domestic data releases intersects with expectations for a 50 basis point move at the Bank of England’s meeting next week.
Expectations have risen ahead of this morning’s US gross domestic product number. According to median consensus forecasts provided by Bloomberg and Reuters, the economy expanded 0.4 percent in the second quarter - and many still expect a contraction - but yesterday’s inventory and trade data managed to beat estimates.
Investors think jobless claims will fall. Data due at 8:30 am is thought likely to slip to 249,000 after ticking higher in the prior week. Evidence of softening labour markets has been confined to anecdotes, sentiment surveys, and earnings reports thus far, with very little in the way of hard data to go on.
Evidence of rising wage pressures in Canada could lift the loonie when the national statistics agency releases its latest Survey of Employment, Payrolls and Hours at 8:30 am. Average weekly earnings are expected to trend higher in May, after rising 4 percent year-over-year in April.
Tomorrow’s gross domestic product report might be more meaningful for politicians than markets. Economists polled by the major data providers think the economy grew at a 0.4 percent annualized rate, after declining at a -1.6 percent pace in the first quarter. A second consecutive contraction is entirely possible, with implications for business and consumer psychology as political narratives grow louder. But most investors are already convinced of an imminent slowdown, and the trade and inventory effects that often dominate headline economic output prints are not critical in driving market behaviour.
Janet Yellen will provide an economic update this afternoon. The former Fed chair will likely repeat Jerome Powell’s comments from yesterday, pointing to solid demand and a “very strong labour market” as evidence showing that the economy has not slipped into recession - but she is unlikely to persuade her political counterparts or turn the tide in the financial media. Sentiment continues to weaken - and in today’s spin-driven economic landscape, sentiment is everything.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
USD Gross Domestic Product, Q2
CAD Survey of Employment, Payrolls, and Hours, May
USD Weekly Jobless Claims
EUR Gross Domestic Product, Q2
EUR Consumer Prices, July
MXN Gross Domestic Product, Q2
CAD Gross Domestic Product, May
USD Personal Consumption Expenditures, June
USD Employment Cost Index, Q2
USD University of Michigan Consumer Sentiment, July (Final)