The stock market is in a state of confusion – now what?

Outlook: We’ve had a hodgepodge of data around the world this week and a whole lot of it: the RBNZ policy decision, the Canadian CPI, the German PPI and ZEW. Econoday reports that UK consumer inflation will be the highest (predicted to rise from 0.4% to 9.8%), but we’re also getting payrolls and average earnings. In the US, we get Fed minutes tomorrow, housing starts and industrial production and retail sales on Wednesday. The interesting thing about retail sales is the flat reading forecast. Today brings the Empire State production survey and TICS.

If you care about history, this is the 51st anniversary of Pres Nixon who ended the dollar’s gold support and thus the “end” of Bretton Woods, although so much of what is located there is still with us.

The news from China has the potential to blow up the markets. If US retail sales stagnate, China will be the most affected exporter. Interest rate cuts cannot compensate for that. Meanwhile, the zero Covid policy has led to lockdowns and continues to threaten production in several places. Western experts are universally critical. Bloomberg points out that “Gold responded to the slowdown by falling as much as 1.1% after four consecutive weeks of gains.” A week or so ago, the WSJ had pointed to weak gold as a function of declining Chinese demand. You would think there would be a rising demand if the mortgage payment cessation is such a big deal.

We had a rare and rapid turnaround in sentiment last week, from inflation panic and expectations of 75bp in September to tame inflation data with sentiment flipping to “just” a 50bp increase in September. As expected, however, the Fed’s comments poured cold water on the 50 bp idea with confirmation that some more tame measurements will be needed to justify a policy rethink (Richmond Fed Barkin). According to Bloomberg, that expectation had fallen to 47 bps last week and is now around 60 bps.

This leaves the stock market in a state of confusion. To the extent that the big gains – the S&P has recovered about 50% of its previous losses – can be placed with those who view the Fed as fundamentally lenient – now what? Assuming the August data is also tame, as now predicted, won’t we get a sustained rally? That is the view of JP Morgan Chase, who sees the rally continuing through the end of the year.

But as Bloomberg reports, “Morgan Stanley strategists said in a note Monday that the sharp rally since June is just a pause in the bear market, predicting that stock prices will fall in the second half of the year as earnings weaken, interest rates remain rise and the economy slows.”

Oxford Economics expects the coming data to be favorable: While rents are not falling and house prices are tacky, “…the process should begin soon, as falling demand for homes will trickle down to lower prices and eventually congestion in the apartment market will ease.” reduce, reducing rental costs. Meanwhile, the easing of price pressures on a wider scale should continue in the coming months as the supply squeeze is dissipating; delivery times are shortening, freight costs are falling and price spikes caused by pent-up demand for services, especially for holidaymakers, are declining; the prices of hotels, airline tickets and rental cars have all fallen significantly in July.”

Of all the inflation charts that come like bullets, here’s one we like:


The implication is clear: more stock rallies. Unless oil and gas prices return to an upward trajectory. But don’t settle for some flip-flops in other contributors to risk sentiment. Earlier this year, after China locked down Shanghai and other major cities, the outlook for Chinese growth was bleak and risk aversion increased. Then we had some surprisingly good months and the anxiety subsided. If risk aversion is back, we can assume that the classic beneficiaries are back too: the yen, Swissie and dollar. The growth-promoting currencies (CAD, AUD and NZD) are losing their luster, and indeed that is what we are seeing this morning.

Then there is the hot war. This is still lukewarm, as no one thinks China will invade Taiwan over Nancy Pelosi, so the US sent another delegation. There is now fiddling with sabers on both sides.

Finally, the WSJ points out that the US workforce is shrinking and is “about 600,000 smaller than it was in early 2020, when Covid-19 triggered a deep but brief recession. It is several million smaller if you adjust for population growth. After reaching pre-pandemic levels earlier this year, the number of employees has fallen by 400,000 since March.” No one understands it, but the implication is clear: Instead of wage increases being abolished by the Fed, companies that want to stay in business must offer wage increases to maintain the workforce. This puts the Fed dead in the face of a “natural” or organic price trend. We must stay informed.

For all these reasons and probably a few more, the tide has turned in favor of the dollar. We didn’t expect a pullback until Tuesday, but never mind – and it could be annoying if incoming data shows that the US is sticking with a decent recovery. This will add interest to the Empire State and Philly Fed reports.

Tidbit: Housing inflation is dire. On Friday, the National Association of Realtors Housing Affordability Index fell to 98.5 in June, the lowest level since June 1989. Sales themselves have fallen for 5 straight months, partly due to the affordability issue, including rising prices and rising mortgage rates. As the WSJ reports, “Existing home prices have risen 46% nationwide over the past three years… and mortgage rates have risen since the beginning of the year, from 3.1% at the end of 2021 this week to 5.22% .” Slowly falling prices are now being somewhat offset by a shortage of new homes that emerged after the 2007-09 recession. Zillow says prices won’t go back to 2019 levels, but we say we need to be mindful of the source’s self-interest.

This is an excerpt from “The Rockefeller Morning Briefing”, which is much larger (about 10 pages). The Brief has been published every day for over 25 years and represents experienced analysis and insight. The report provides in-depth background and is not intended to provide guidance on FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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