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Inside the Broker - Bulls and bears continue to tussle

Inside the Broker

Bulls and bears continue to tussle

At the beginning of this month investors celebrated the run-up to US Labor Day and the unofficial end to the summer by pushing both the S&P 500 and NASDAQ 100 to fresh record highs. But last week equity markets pulled back in a move which saw the Dow Jones Industrial Average, the S&P 500 and the NASDAQ 100 post losses of 2.2%, 1.7% and 1.6% respectively. For the S&P, this was the biggest weekly decline since February this year. The negative sentiment continued into this week as well. On Tuesday the S&P 500 hit its lowest level in over three weeks, coming close to its 50-day moving average – an indicator that has often acted as support this year. That said, it is interesting that commentators have been making such a fuss about it. The sell-off has only become an issue because market pullbacks are so rare these days. There was no specific trigger for the negative sentiment. But investors seemed anxious to book some profits as indices hit record levels and as the stock market approaches a time of the year when there have been some significant pullbacks. No doubt the end of summer and the second quarter earnings season have played a part, as did Federal Reserve Chairman, Jerome Powell’s dovish speech at the Jackson Hole Economic Symposium at the end of last month. It felt as if all the good news was priced in. Certainly, Mr Powell’s speech helped to calm the nerves of those investors who worry about the effect of the Federal Reserve tapering its monthly bond purchase programme may have on equities. The feeling is that fiscal stimulus has played a significant role in lifting stocks, so its withdrawal, no matter how gradual, will no longer provide a tailwind.

Inflation update

On Tuesday we got the latest US inflation update in the form of the Consumer Price Index (CPI). All the various versions, whether they be month-on-month, year-on-year, headline or core, came in below expectations. This was good news as far as investors were concerned. The cooler inflation readings were seen as taking the pressure off the US Federal Reserve as they suggest that inflation really could prove to be transitory. If so, then the central bank won’t be forced to tighten monetary policy sooner than currently anticipated to dampen inflationary pressures. That was the interpretation, and that is why an initial sharp rally in stock indices followed the data. Last week saw the release of another inflation measure, the Producer Prices Index (PPI). This rose 8.3% year-on-year which was the biggest annual advance since 2010 when records began on this data series. This added to fears that inflation may not be as transitory as the Federal Reserve would like to think. It also raised concerns that producers would be forced to pass on raised costs to consumers. Tuesday’s CPI release calmed fears, for now. But if the prices that producers are paying continue to rise, then inevitably these will be passed on to the end user. So, it’s important not to get too excited about a single data release – it’s the trend that is important and it’s too early to predict that inflation has peaked.

Federal Reserve’s FOMC meeting

This is likely to weigh on the minds of members of the Federal Reserve Monetary Committee (FOMC) when they meet next week. This is an important meeting given recent numbers on both inflation and employment. It is also when committee members produce their quarterly Summary of Economic Projections. This displays their individual, and anonymous, forecasts for inflation, employment, GDP and interest rates out to 2023 and beyond. Bear in mind that while inflation is a major concern and one pillar of the Fed’s dual mandate, so is unemployment. Recent data suggests that the outlook for both is uncertain. With the latest Producer Prices and CPI indicating a mixed picture, the last update for Non-Farm Payrolls (NFP) also upended recent confidence in the pace of jobs growth. The August NFP number fell way short of expectations. Not only that but there’s still a shortage of around 5.3 million jobs from pre-pandemic days. The Federal Reserve has made it clear that it is working to get unemployment back to pre-pandemic levels. This would suggest that the US central bank will take its time and want to see further evidence of improvement in the jobs data before it starts to taper its bond purchase programme as a precursor to raising interest rates. Next week’s monetary policy statement and subsequent press conference with Jerome Powell may give us some answers.

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