US markets closed lower on the weekend as trading in New York saw a significant downturn.
What was most concerning was how this peaking of equities coincided with a fresh US dollar rally. This suggests what we are seeing may well be just the beginning of another intense wave of broad-based de-leveraging.
A lot of speculative long positions across stocks, the Euro, and the Australian dollar had been built up on the belief and basis that due to recent deteriorating economic data, the US Federal Reserve would somehow magically decide to go on pause.
Many were even suggesting the absurd notion that the Fed would be cutting interest rates in 2023.
First of all, a pause is highly unlikely with inflation even above 5%, let alone still sitting at 8.5%.
What the market conversation in the main seems to be missing is that the current Fed Funds Rate is still at highly stimulatory levels. The Fed is still feeling inflation. Its actions have not even begun to dent inflationary pressures at all. Nor have they begun to crimp economic activity at all. The economic slowdown was already in play for other reasons.
The Fed continues to stimulate the economy and must urgently get above neutral into restrictive territory if it is to hope to have any impact on inflation.
The current inflationary pressures, in the mind of the Federal Reserve, secretly and behind closed doors, means a rate setting more in the vicinity of 4% or 5%.
This means there is a long road ahead before the Fed is done.
That some have suggested the Fed would be cutting rates next year is a lovely fantasy at best. At worst, it would mean the US economy had entered a much deeper recession, even depression, and a real panic was on.
This scenario of economic collapse is a very real possibility. A small probability, but for the first time in many decades, it is firmly on the horizon.
The construction industry, factory activity, and even services are showing signs of rolling over sharply. There may be modest bounces but their absolute levels of activity have been falling significantly.
At the same time, mortgage stress is about to become mainstream front page news again. Similar to what happened at the start of the US GFC. The US is facing ongoing high inflation, a movement to highly restrictive rate settings by the Fed, and natural gas energy price increases that could well go from already catastrophic to more of a ‘leaving the solar system’ kind of feeling.
The pain confronting the US economy is only about to hit with full force to be seen and develop over the next 6-12 months.
The US economic downturn, like that of Europe, is only in its early stages of development. Not at any form of turnaround point, as had been hoped for with the recent strong upward correction in equity market values.
Expect renewed and sustained pressure on US, European and Australian equities to the downside. As the realisation of more trouble ahead with ever higher still interest rates, begins to bite.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
