Stock Market Braces For Fed Pain
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This week saw more losses in the financial markets as fears over
central banks’ monetary policy and a faltering global economy
resurfaced.
As the Fed chairman reiterated that monetary tightening would continue
in the coming months to limit inflation, despite the fact that US
growth is anticipated decline, Jerome Powell’s comments at the
Jackson Hole symposium provoked turbulence.
US stocks last week were fluctuating. Major averages moved up somewhat
on Wednesday and Thursday after beginning the five-day period in the
negative.
FED AND INFLATION
After that, on Friday, markets fell after Fed Chairman Jerome Powell
declared that the government would “use our tools decisively” to
combat inflation, which is still running at a four-decade high.
Indicating that battling inflation is more crucial than promoting
growth through an accommodating monetary policy, Powell further stated
that raising rates will cause “some harm” to the US economy.
Not just stocks responded to the news; other asset classes also did.
As traders considered his remarks, Bitcoin and other cryptocurrencies
decreased.
THE FED IS STILL NOT PERSUADED THAT INFLATION HAS REACHED ITS
PEAK. As a result, it doesn’t anticipate ever ceasing its rate
increases. Powell is careful not to stop raising interest rates too
soon, adding, “We must keep at it until the job is done.”
ACCORDING TO TRUFLATION (WHICH TRACKS INFLATION IN REAL-TIME), IT
APPEARS TO BE DOWN, BUT NOT TOO EARLY TO DETERMINE A DOWNWARD TREND.
THE FED VIEWED JULY’S INFLATION FIGURES AS ENCOURAGING EVIDENCE THAT
THE RATE OF ACCELERATION IS DECREASING AND THAT THE INTEREST RATE
INCREASES. A strong dollar policy (compared to other currencies)
positively impacts this trend.
THE ACTUAL RISK STILL LIES IN THE FED’S LIMITED ABILITY TO REDUCE
INFLATION, making the Fed’s target inflation rate of 2 percent, not
just an impossibility but also one that won’t be reached for a very
long time.
A huge factor in inflation is the government budget. Former president
Barrack Obama’s economic council chairman Jason Furman stated
Wednesday that the _student debt forgiveness program is projected to
increase inflation by 0.2-0.3 percent._
THE HUNDREDS OF BILLIONS OF DOLLARS IN INCREASED GOVERNMENT SPENDING
UNDER THE INFLATION REDUCTION ACT COULD ALSO BE INFLATIONARY.
GOVERNMENT SPENDING WAS THE PRIMARY DRIVER OF THE GREAT INFLATION,
WHICH LASTED FROM 1968 TO 1982, TO RESTATE ONE OF MY CENTRAL CLAIMS
FROM THE PREVIOUS 18 MONTHS.
Even though experts were aware that both the Vietnam War and the Great
Society contributed significantly to inflation, PRESIDENT LYNDON
BAINES JOHNSON’S ADMINISTRATION WAS UNWILLING TO REDUCE THESE
EXPENDITURES (BIDEN’S BUILD BACK BETTER). THE BIDEN ADMINISTRATION
IS IMITATING LBJ’S ERRORS.
CONCLUSION: FED’S PAIN DECISION
The Fed will have to choose between decreasing rates to promote
economic development or fighting inflation as Paul Volcker did in the
1980s, which led to the historic double-dip recession, as long as it
keeps raising interest rates. A change in the Fed’s approach in this
area, known as the “Fed pivot,” will cause inflation.
ECONOMIC DATA
The University of Michigan consumer mood index performed better than
predicted in terms of the economy. The final number for August, 58.2,
easily exceeded expectations of 55.3 and was higher than the result
for July, 51.5. The lowest rating in eight months, year-ahead
inflation forecasts dropped from 5.2 percent in July to 4.8 percent.
The US labor market will be the focus of attention this coming week.
If July’s excellent performance were a one-off or indicative of a
larger trend, data due on Friday would reveal. Recall that nonfarm
payrolls rose by 528,000 last month, exceeding predictions of 290,000.
The Dow fell 4.22 percent for the entire week. The Nasdaq Composite
dropped 4.44 percent, while the S&P 500 fell by 4.04 percent.
SEPTEMBER-OCTOBER CRASH?
Germany will announce its early August inflation rate on Tuesday, and
France and the Eurozone will be in the limelight the next day.
Updates on consumer confidence, construction expenditure, and vehicle
sales are just a few of the economic indicators expected this week
before the big August jobs report arrives at the end of the week. The
August U.S. jobs report is anticipated to show 300K monthly job
additions and a stable unemployment rate of 3.5 percent.
The headliner earnings reports on the corporate calendar are from
Lululemon (LULU), HP Inc. (NYSE: HPQ), and Broadcom (NASDAQ: AVGO),
while a strategy update from Bed Bath & Beyond (NASDAQ: BBBY) also
stands a high possibility of moving the stock price.
No, there isn’t a central bank line this week; you’re not
dreaming. But don’t worry, some Fed members will keep talking in the
coming days.
KEY EVENTS & CALENDAR
* Tuesday, August 30 – JOLTS Job Openings (July)
* Thursday, September 1 – ISM Manufacturing PMI (Aug)
* FRIDAY, SEPTEMBER 2——JOBS REPORT
Germany will announce its early August inflation rate on Tuesday, and
France and the Eurozone will be in the limelight the next day.
Updates on consumer confidence, construction expenditure, and vehicle
sales are just a few of the economic indicators expected this week
before the big August jobs report arrives at the end of the week.
THE AUGUST U.S. JOBS REPORT IS ANTICIPATED TO SHOW 300K MONTHLY JOB
ADDITIONS AND A STABLE UNEMPLOYMENT RATE OF 3.5 PERCENT. I CONTINUE TO
THINK THE FED WANTS TO SEE A 5% NUMBER BEFORE THEY STOP RAISING RATES.
A SUDDEN INCREASE COULD CAUSE A DOVISH FED, WHILE AN EXPECTED RATE OR
DECREASE WILL CAUSE A HAWKISH FED.
The headliner earnings reports on the corporate calendar are from
Lululemon (LULU), HP Inc. (NYSE: HPQ), and Broadcom (NASDAQ: AVGO),
while a strategy update from Bed Bath & Beyond (NASDAQ: BBBY) also
stands a high possibility of moving the stock price.
No, there isn’t a central bank line this week; you’re not
dreaming. But don’t worry, some Fed members will keep talking in the
coming days.
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