Traders play some defense after US consumer confidence disappoints
Dollar dominates, franc shines, tech stocks back under selling pressure
German inflation stats and speeches by Fed, ECB, and BoE leaders today
Royal flush
Growth concerns returned to haunt global markets yesterday after the US consumer confidence index fell short of expectations, adding credence to the view that economic momentum is evaporating as the cost of living crisis bites. Some disappointing regional manufacturing surveys underscored the same point.
Recession watchers have been dealt a royal flush lately with PMI business surveys warning of a remarkable drop in demand, hiring freezes and worker layoffs, retailers unable to unload inventory, consumer confidence tanking, and inflation expectations rolling over.
Although the US economy might avoid two consecutive quarters of negative growth and dodge a recession, there’s no escaping a sharp slowdown. Accordingly, the terminal level for interest rates has been pushed significantly lower. Market participants are betting the Fed will get its wish - inflation will be eradicated, at the expense of the economy suffering.
Tech rout, dollar party
When the economic data pulse is cooling, traders like to shoot first and ask questions later. As such, the major indices on Wall Street took some heavy damage yesterday, losing between 2% - 3%, with the tech-heavy Nasdaq leading the charge lower. That said, this entire week is likely to be more noise than signal in terms of deciphering the price action.
Besides growth worries, portfolio rebalancing flows heading into quarter-end and the ‘buyback blackout’ window where companies refrain from buying their own stock in the weeks leading up to earnings announcements might also be contributing to the turbulence. The question heading into this earnings season is whether executives will corroborate the gloomy signals from business surveys and push back on rosy analyst estimates.
Crossing into the FX complex, it was another case of the US dollar steamrolling everything in its path, defying the disappointing macro data and another awful bond auction that saw little real demand for US Treasuries. The Swiss franc managed to outperform too and seems to be headed for another test of parity against the euro, turbocharged by global growth anxiety and the SNB's determination to exit negative interest rates.
Not every safe haven could shine, though. The Japanese yen and gold prices came under renewed selling interest, both suffering at the hands of a dominant US dollar and the persistent grind higher in real yields.
German inflation, central bankers, and OPEC
As for today, there are several events to keep investors entertained. The ball will get rolling with German CPI inflation numbers for June. Regional figures released so far point to softer inflationary pressures, echoing the worrisome signs from business surveys that firms are struggling to pass on cost increases because of faltering demand.
We will also hear from three of the most important central bankers in the world - Fed Chairman Powell, ECB President Lagarde, and BoE Governor Bailey at 13:00 GMT. Markets want to know how deep the economic slowdown must get before recession concerns trump inflation concerns and central banks take their foot off the brakes, although we are unlikely to get any clear answers.
Finally, OPEC will begin its two-day meeting today. The trajectory of energy prices is arguably the most important variable for consumers, markets, and central banks alike at this stage as it can impact both inflation and growth dynamics. However, expectations are low heading into this meeting amid reports that OPEC doesn’t have meaningful spare capacity to boost production, even if it wanted to. OPEC decisions have a tendency of leaking, so any moves in oil prices could commence from today.