Author: PSE Trading Trader @Christine
Market Reaction: Shocked 😲😲😲
Last week, the market took a hit, dropping 2%, after hearing Powell’s hawkish remarks. This plot twist was actually expected. Powell took the stage and talked extensively about lowering inflation, strong growth, and his firm commitment to maintaining high interest rates to control inflation risks. Of course, in the short term, the dialogue about high interest rates may cause panic for the character of stocks, but the adjustment of the script in the Summary of Economic Projections (SEP) may bring a surprising turn for the stock market in the medium term. The market’s initial reaction, like the audience’s astonishment, was a rise in interest rates and a drop in stocks.
Powell’s View: “Soft landing” should not be the baseline expectation
Powell: “I have always believed that a soft landing is a possible outcome… Ultimately, this may be determined by factors beyond our control, but I think it is possible.”
Dot Plot and Economic Projections
The Federal Open Market Committee (FOMC) maintained its 2024 core PCE forecast at 2.6%, revised 2023 to 3.78%, and raised its actual GDP expectation from 1.1% to 1.5%. This combination of a “soft landing” basically meets investors’ expectations and is seen as a mid-term positive for stocks. The FOMC left the possibility of a rate hike for the rest of 2023 and raised the median for 2024 to 5.1%, while keeping the long-term dot at 2.5%. The upward shift in the dot plot provides a slight balance to the positive growth revisions.
Powell’s Press Conference and Federal Funds Rate
The federal funds rate remains steady as a rock, but the odds of a rate hike in November have jumped from 25% before the meeting to 35%. The market’s mood is like a roller coaster, worrying about the prospects for long-term interest rates. During the press conference, Chairman Powell seemed to be performing a high-level balancing act, emphasizing the importance of data on one hand, while retaining policy flexibility on the other hand, which undoubtedly poured cold water on the hawkish message conveyed by the dot plot. Nevertheless, the basic expectation remains moderately optimistic, and long-term investments focused on growth/technology are still the darlings of the market.
Closing Down: The Battle Between Risk and the Market
If Congress doesn’t get its act together, the US government may face a “shutdown” crisis on September 30th. Recent developments, such as the failure of the House to vote on a continuing resolution (CR) and the rejection of a motion to advance the defense spending bill, have intensified the shadow of this crisis. Although from a macro perspective, a government shutdown may have limited short-term risks to the overall economy, stocks that are highly dependent on government spending may feel a chill.
BTC: Bullish Despite the Bear Market 🚀
Despite the abundance of hawkish information, I remain optimistic about the market. After recovering from the “shock,” investors are bound to bounce back and focus on positive economic data:
US jobless claims fall to 201K, the lowest level since January
Surprisingly, the number of US jobless claims for the week of September 16 actually decreased instead of the expected slight increase. They went from 221k to 201k. The four-week average also declined. More encouragingly, the number of continued jobless claims dropped from 1683k to 1662k for the week of September 9. When looking at the data for each state, it can be seen that only 14 states experienced an increase in seasonally adjusted initial claims. This decline in initial claims is the lowest level we have seen since the beginning of the year, highlighting the strength and tightness of the current job market. This suggests that we may see steady job growth, which could further push down the unemployment rate.
Economic Activity: Still Strong
Last week’s economic data showed that actual economic activity remains strong. Retail sales data exceeded expectations, the Purchasing Managers’ Index (PMI) reported robustness, weekly jobless claims remained low, indicating a healthy economy with no growth in layoffs. In terms of inflation, there are no signs of economic weakness, although inflation is slightly higher than expected, it is not high enough to prompt the Federal Reserve System to raise interest rates at the recent Federal Open Market Committee (FOMC) meeting.
Oil Prices and Inflation: Impact on the Economy
The surge in oil prices is causing gasoline prices to rise, which undoubtedly will hit consumer spending. However, since the US is now a major oil-producing country and is largely energy independent, there are winners to offset the losers. The bearish economy is concerned about these price increases and sees higher oil prices driving the total inflation rate to +0.6% in August, while the core inflation rate is only +0.2%. Despite concerns about the Fed and inflation, the market’s direction and narrative focus more on the strength of the economy and corporate profits in the next six months.
Some Risks: Strikes, Shutdowns, and Market Volatility
The strike by the United Auto Workers may last longer than expected, and the upcoming government shutdown in October could have a moderate impact on the economy.
However, the market is ignoring the chaos and political posturing from Washington and maintaining its positive momentum, possibly leaning towards an upward trend by the end of the year. The performance of tech stocks remains strong until their earnings disappoint, and Arm Holdings’ successful IPO last week demonstrates a healthy restart of the IPO market and continued demand for risks.
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