There is nothing new in Friday’s strong US data. We knew the jobs market was strong. Impressively adding 519,000 jobs with unemployment at its lowest level since 1969.
Yet, for markets, which wanted to magically believe the US Federal Reserve would stop and pivot, it truly was a shock.
All that false excitement about the Fed being wrong, about having to hike rates, and that somehow the latest ‘increase’ in interest rates was a reason to buy stocks, all spoke to just how over-exuberant and euphoric the market has become.
Sheer madness best describes the buying after the FOMC decision. Where rates were raised and it was made clear they would continue to go higher. Probably, according to the Chairman himself, by at least another 50 points. Furthermore, that rates would stay high for a considerable amount of time.
Far be it for the Chairman of the Federal Reserve to specifically tell markets, hey, you have this wrong, and I am telling you so, but he did try as diplomatically as he could.
As social media style meme trading sweeps across the world, this dumbed down approach, such as Bitcoin, where everything is a simplistic one reason market has finally caught up with the mainstream by way of the US Stock Index futures markets.
Now, with all that buying having been done and a still profound self-belief that meme traders know better than anyone remaining in place, the market is caught long as the economy/non-jobs languishes, earnings are going still lower, inflation continues to cause extreme damage and the Fed will of course continue hiking?
US Services PMI bounced back from contraction to modest expansion. However, the price pressures component remained extremely elevated. Confirming the Fed still needs to act. Even, perhaps, more so than it itself currently anticipates.
We are going to see another two 25-point rate hikes. My concern is, Friday’s data actually points to another four 25-point rate hikes, this year. Should inflation remain sticky at high levels, then another six hikes are definitely possible.
Markets had pinned their hopes on 4.25%, according to futures pricing, by year-end. This disconnect, where traders are being proven wrong and the Fed correct, can only result in a significant correction to stock prices.
The only question is, just how long are all these traders and fund managers, who magically believed in the fairy tale of a pivot?
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
