Stock Market Today
Markets snapped their four-weeklong rally on Friday, and today, investors and traders are picking up the momentum where they left off last week. The major concern among investors and traders is that the Fed will likely continue to increase the interest rate in the US, which will hurt consumers who are already struggling. We may indeed have seen a peak in the US inflation data. However, we are still far from reaching the normal inflation level, which means more pain for US consumers.
The big fear in the market now is that the downtrend that started on Friday could push the stock indices to re-visit this year’s low if sentiment doesn’t improve. But suppose the economic data continues to hold some strength or doesn’t show significant weakness. In that case, we may only see choppiness in the market rather than a major downtrend.
This week will bring some critical economic events into the spotlight, which traders will assess very closely.
First, we will get the US Prelim GDP data on Thursday which will set the trading tone.
The US has achieved a standard definition of a technical recession after two consecutive quarters of negative GDP growth. According to the initial estimate of second-quarter GDP, the US economy shrunk by 0.9% annually in Q2 after contracting by 1.6% year over year in Q1. The reduction in domestic investment and inventories during Q2 seems to have been constrained by rising inflation, which also contributed to the decline in production. Gross domestic private investment decreased by 13.5%. Despite a 1% increase in overall personal consumption during the quarter, spending on durable goods decreased by 2.6%.
There is no anticipated significant change in the second reading of the US GDP for the three months ending in June. However, GDP data is expected to show some improvement as the forecast is for -0.8%, while the previous reading was at -0.9%.
Jackson Hole Symposium
On Thursday, we have the Jackson Hole Symposium, and traders would like to know how the Fed will bring inflation to its normal level.
More rate increases are anticipated shortly from the Fed. According to consensus forecasts, the federal funds rate will increase to a target range of 3.5% to 4% before the year is over. If the markets anticipate Fed Chair Jay Powell to be dovish on inflation, they will likely be disappointed. It’s rather astonishing that the market is even pricing in the Fed beginning to stop its cycle of rate hikes while inflation is still so high, over 2%. Powell has an opportunity to dispel that misunderstanding during the symposium.
The Jackson Hole event will also be an opportunity for the Fed to amend its reputation. Remember, the Fed made one mistake of allowing inflation where it is currently and called the situation transitory. The Fed will likely use the event to send a clear message that there will be no more mistakes by them, and they will take whatever it takes to bring inflation back to its normal level. However, many investors believe that higher inflation will likely stay with us for a long time.
Core PCE Data
The July reading of the core PCE price index, reportedly the Federal Reserve’s favoured inflation indicator, will be available to attendees on day two of the symposium. It increased to 4.8% in the year to June after dipping to 4.7% in May.
Oil prices are trading lower to begin the week as traders believe slower economic growth will adversely influence the prices. The three-day rally we experienced in oil prices last week seems to have lost momentum as there are more bears in the market than bulls. Investors believe that if the Fed continues with its hawkish monetary policy, it will create more obstacles for the US economic growth, which could negatively affect oil demand. In addition, traders are also paying attention to the power supply situation in China, and power restrictions in some regions could affect economic activity as China’s southwestern Sichuan began limiting electric power supply.
Finally, traders are keeping a close on the Iranian nuclear deal, and it is highly likely that any progress on that front will adversely influence oil prices.