The US equity market saw a bumpy week that ended with the S&P 500 and NASDAQ ending in losses as Thursday’s rally was wiped out on Friday. Inflation data releases were higher with core inflation at 6.6% and headline inflation at 8.2%. The stock markets initially rallied on the release as investors digested the news and stocks fell to session lows on Friday following the release of the customer survey from the University of Michigan survey showing inflation expectation is increasing, a sentiment that the US Federal Reserve is following closely. The NASDAQ Index comprised mostly of tech sector stocks registered
the highest decline as growth companies are more sensitive to interest rate hikes.
Higher inflation and a strong labor market continues to weigh on investor sentiment as it makes the possibility of a Fed policy pivot more unlikely. A pivot would be needed for the equity markets to rally in a sustainable way. As inflation remains higher and fed hikes further, the risk increases that the US economy is pushed into recession and outlook for corporate earnings is bleak. Last week, there were mixed earnings reports from a slew of banking stocks including Citigroup, JP Morgan and Morgan Stanley. Despite negative news relating to the health of European banking giant Credit Suisse and inflation and
recession jitters, analysts have not drastically cut the earnings outlook for the group. Credit Suisse rallied on Friday after the bank executed a buyback of $3 billion of its own debt. Earning season continues in full swing with releases expected from Proctor & Gamble, Goldman Sachs and Barclays.
Across the pond, the new Chancellor of Exchequer, Jeremy Hunt, has reversed most of the fiscal package announced by Liz Truss’s government, scrapping almost all tax cuts along with making changes to the promised energy policy. The original 2-year scheme now would end in April and would be replaced with
a more targeted plan that would cost the taxpayer significantly less. The move is hoped to bring more stability to the financial markets.
Commodities, FX and Bonds
US Treasuries also registered a volatile week with yields whipsawing in response to Thursday’s inflation report. The yield on the 10 Year note rose above 4%, reaching the highest level since 2008. The price of Crude Oil fell with WTI at 86.73 and Brent at 92.74 amid concerns about a slowdown in demand as China cities reimposed Covid-19 lockdowns. The Energy Information Administration (EIA) reported that the U.S crude inventories has surged by 9.9 million barrels last week. A week after OPEC+ has agreed to cut production by 2 million bpd, the Biden administration plans to take steps to reduce the price of oil and is considering releasing more oil from the Strategic Petroleum Reserves and imposing limits on the exports of energy products.
Please find the full weekly note below: