Sudden Stock Rollover Risks

Stocks could not maintain recent momentum and began to fall back in on themselves in Friday’s New York trading session.

This sentiment has continued throughout the Asian Monday morning.

What we are seeing is the dying off of the green shoots of hope that the US Federal Reserve will pull back from its aggressive stance.

Last week’s stock market gains were partly due to some deterioration in the run of the economic data. As the market interpreted this to suggest the Fed would again be encouraged to slow, even pause, its aggressive interest rate cycle.

In fact, despite well-telegraphing the likelihood of a slowing of the pace at some point, the Fed has nonetheless maintained its very clear central mantra of continuing to hike until inflation is defeated. Does anyone see the inflation wild cat being put back in its cage any time soon?

US inflation expectations just spiked again and inflation is now broad-based across the entire economy. Perhaps, what the market should most be fearing, for those who believe the stock market is only about Fed rates settings that are, is any indication of a strengthening economy. The Fed has clearly stated numerous times that it is all about reducing demand at the moment.

For the foreseeable future, the Federal Reserve will continue to hike interest rates. Regardless of immediate data. There is no question at all about this. Only inflation falling to the 4% to 5% area would at all allow a reduction to 25-point hikes. As far as we can see from the current vantage point, the Fed will remain tracking at 75-point or 50-point increments to much higher levels.

As we have previously forecast, the end rate could well be as high as 6.5%, or 7.5%. The stronger the US economy, the higher this end number will be. Where is the joy for equities in this scenario?

After the very strong and impressive rally of recent weeks, any loss of momentum such as we are currently seeing is a big warning flag. Especially, when in the end, US interest rates are going to be raised until the US economy is crippled and inflation defeated.

On the bright side for traders, this does lead to a still higher US dollar. The US dollar is now certainly a bubble market, but it still has much further to grow before bursting.

For the moment traders would be wise to sell Euros, Sterling and the Australian dollar on any momentary strength. Non-Yuan Asian currencies are likely to fair far better over the course of 2023 than will non-US dollar western currencies.

Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities

Previous articleGlobal Inflation Likely To Have Peaked, Key Data Indicators Suggest
Next articleTealive Goes Global, Opens First Outlet In Canada

LEAVE A REPLY

Please enter your comment!
Please enter your name here