Stocks at Risk on PMI Data, NVDA Guidance, Hawkish Fed: Macro Week Ahead
Aug 21, 2023
Sellers held sway again last week on Wall Street. The benchmark S&P 500 stock index fell 2.2%, hitting a two-month low. The U.S. dollar marched higher for a fifth consecutive week while gold prices slid a third one and the yield curve steepened, with borrowing costs higher across maturities.
Scanning the headlines, all this seems to have been chalked up to speculation about a “higher for longer” repricing of Federal Reserve interest rate expectations. Some of this is almost certainly afoot, but the adjustment has been modest at best.
Futures markets now price in a Fed Funds rate of 4.33% at the end of next year, up from 4.0% flagged three weeks ago when the risk-off sweep began. That speaks to a slightly reduced scope for easing in 2024, to the tune of about one standard sized 25-basis-point (bps) rate cut. The probability for another hike this year has not meaningfully changed. The rate expected by the end of 2023 has limped upward from 5.38% to 5.43%, a meager five bps.
There seems to be more to the story. A telltale rise in the Japanese yen toward the end of last week—a move that left the dollar well-supported while bonds held back from breaking below trend-defining price levels—suggests markets are beginning to worry about more than just a longer-lasting headwind from a hawkish U.S. central bank.
With China struggling to reboot its economy after scrapping COVID-era lockdowns and the Eurozone dipping into recession, the worry seems to be that Fed hawks will kick out the last bit of support upholding global growth and trigger a broad-based slump.
Here are the key macro waypoints shaping the story in the week ahead:
A slew of Purchasing Managers' Index (PMI) surveys—a timelier approximation of economic growth trends than gross domestic product (GDP) numbers, which tend to be released with significant time lags— seems set to show the global economy continued to slow in August.
Eurozone manufacturing- and service-sector activity is expected contract for a third month straight while growth in the U.S. slows to the weakest since February. Numbers tracking Australia, Japan, and the U.K. are also due. Soft results may amplify global recession fears, hurting stocks and underpinning bonds while the U.S. dollar and Japanese yen outperform against other major currencies.
The darling of the artificial intelligence (AI) frenzy in the global tech sector smashed forecasts when it reported first-quarter results, helping to kick off a blistering rise in the technology-heavy Nasdaq 100 stock index.
A strong showing is expected, but markets will be paying close attention to the guidance on offer alongside results, particularly vis-à-vis the firm’s sensitivity to China. Worries about mounting uncertainty and tepid demand as the world’s second largest economy attempts to regain momentum might sour sentiment, adding to the impetus for liquidation across equity markets.
The annual gathering of Federal Reserve officials and other monetary policy and macroeconomics bigwigs in Wyoming will begin on Thursday, but all eyes are on the speech from Jerome Powell, Fed chair, on Friday.
U.S. central bank leaders often use the gathering as an opportunity to paint a broad-based picture of where they intend to steer in the 12 months ahead. This establishes the lens through which financial markets ought to be interpreting incoming information and applying it to policy expectations. Rhetoric signaling a willingness to stay in the fight against inflation even at the cost of enduring a recession may bolster the possibility of another rate hike in 2023 and reduce the projected scope for easing in 2024, cooling risk appetite across the asset spectrum.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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