Stock Market Today
US and European futures are trading lower while the dollar index seems to have paused its rally as traders assess the likelihood of further rate hikes by the Fed in the US. The economic data released yesterday confirmed that the US economy is applying breaks, and any aggressive and hawkish monetary policy will only come at a high economic cost. Higher interest rates slow down the economic growth in the US.
The Dow Jones Industrial Average futures dropped by 150 points. Futures for the S&P 500 and Nasdaq 100 fell 0.5%, while futures for the Dow Jones Industrial Average dropped 0.4%.
The Dow and S&P 500 fell on Tuesday for a third consecutive day, despite light trading volumes. Tuesday ended with minimal movement on the technology-focused Nasdaq Composite. After gaining more than 9 points in a single month, the S&P 500 is almost flat in August.
Powell is scheduled to talk on the last day of the Jackson Hole Economic Symposium (which begins on Thursday) on the morning of May 4th. Investors anticipate that Powel would reiterate the Fed’s mission to reduce inflation and reign in investors’ anticipation of price increases.
The fact is that there will be no shortage of volatility in the coming days, and financial markets will stay in stormy seas until Fed Chair Powell’s Jackson Hole address on Friday.
As a result, he may have trouble convincing markets that he’s willing to tighten policy and bring on a recession. It’s too soon for the Fed to suggest that they’ll be less aggressive with tightening policy, despite the apparent weakening of the economy.
The economy’s strength is another indicator that investors will be watching closely. The Wednesday agenda includes reports on durable goods and pending home sales.
The BOE and Inflation
As officials in Britain attempt to rein in out-of-control inflation, interest rates might reach 4% as soon as next spring.
The money markets seem to agree, with traders increasing their wagers on the likelihood of further, more aggressive tightening from the Bank of England. With the gas situation worsening and winter coming up in a matter of months, many people believe that the government will have to initiate a severe recession to slow inflation, which is now rising at its highest rate in 40 years.
Interest rate swaps linked to central bank decision dates show traders are now betting on about 235 basis points of rate rises by May. That would be the largest in this cycle and would push the key rate from its current 1.75 per cent to 4 per cent, which is a full percentage point more than predicted in the previous month.
Traders are betting that consumer prices will continue to rise at a record pace, leading Citigroup Inc. to predict that the headline rate will rise over 18% in the next year. As a result of the Fed’s more robust stance against inflation, the market is betting the BOE will raise rates even sooner.
The pound, however, has not capitalised on the opportunity as growth prospects have dimmed, and on Tuesday, it fell to $1.1718, its worst level since March 2020. The yield on UK government bonds with a maturity of five years has risen to 2.50 per cent, a level not seen in the market in almost ten years.
The BOE has increased rates in six straight sessions, with the most recent increase being the most significant half-point increase in almost two decades.
Oil
As expectations of an immediate production reduction by the Organization of the Petroleum Exporting Countries and allies, known as OPEC+, diminished, oil prices dipped on Wednesday, taking a respite from an almost 4% increase the previous day.
Nine OPEC sources made it clear that prospective production cutbacks by OPEC+ may not be immediate but are likely to coincide with the return of Iran to oil markets should that nation reach a nuclear agreement with the West.
Many investors knew that even if an agreement were reached to revive Tehran’s 2015 nuclear deal, it would still take several months for Iranian oil to flow into the international market, so Tuesday’s reaction was overdone. This is because OPEC+ would not cut output so quickly if Iranian oil started flowing into the market.