Was the demonstration on Wednesday legitimate? This morning, futures are down as bond rates are climbing once again.
One of the few positive stories since Jackson Hole was the Bank of England’s intervention, but was it significant? The two main concerns for the markets are 1) the worry that the Fed will raise rates so far as to trigger a recession and 2) the fear that earnings will plummet and turn negative.
The BOE’s actions don’t do anything to ease those worries.
But are these issues the only ones we have to worry about? Because of an additional fear in the market, the move was well received, according to Chris Harvey, head of equity strategy at Wells Fargo Securities.
Harvey said in a customer memo, “Earnings are a fear but not the worry. The true danger, in our opinion, is the eroding confidence in central banks’ capacity to navigate these challenging times (and, quite frankly, the stench of desperation).
“I’m worried about losing faith in the U.K. During the Delivering Alpha conference, Citadel CEO Ken Griffin said to CNBC’s Scott Wapner. It marks the first time in a long time that investors have lost faith in a significantly developed market. And it symbolizes a nation’s difficulties when a bad policy is implemented.
Conclusion: The BOE involvement is highly helpful if the concern that central banks are losing the ability to handle the crisis contributes to the slump, particularly in Europe.
Investors need to spot evidence of inflation decreasing for this to be anything more than a “dead cat bounce.”
“We remain doubtful,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, in a letter to clients on Thursday, “that the markets’ Wednesday calmer attitude signifies the end of the current period of increased volatility or risk-off sentiment.” Investors will need solid proof that inflation is under control, allowing central banks to become less hawkish and for the advance to be more prolonged.
The August personal consumption expenditure, scheduled to be released on Friday, is the following inflation data point. It has traditionally been the preferred inflation indicator at the Fed.
After climbing to 6.3% in July, the August PCE is forecast to come in at 6.0%, with core prices (excluding food and energy) up 4.7%. Month over a month is predicted to up 0.1% for the headline and 0.5% for the core.
Stocks might surge higher once more if Friday’s PCE is slightly below expectations. If not, bond rates would rise further, and stock prices will fall further.
The macroeconomy is still driving the story, but we must see evidence that profits are not about to tank in the next weeks. We will receive a minor data point from Nike, which reports Thursday after the market closes. Nike receives a sizable portion of its revenues abroad, like FedEx (25% from Europe and 20% from China).
Is 2% an acceptable inflation target? Growing volume is the chorus of opposition to the Fed hiking rates until inflation reaches 2%. Chris Harvey at Wells Fargo is an excellent example of this debate.
Given the trends of onshoring and regionalization, countries prioritizing security over price, and the fact that China’s development would no longer act as a deflationary force, there is a growing chorus that 2% is just a number and may not be the right inflation target over the next several years, he said. Clients have stated that they prefer steady inflation of 3 to 4 percent with no recession over a 2% inflation rate.