Stocks trade mix, BOE fearful of long recession

Stocks trade mix, BOE fearful of long recession, Continuing Claims rise, WTI breaks below $90, Gold shining brightly, Bitcoin stuck Stocks continue to ignore the deepest yield curve inversion since the early 2000s. ​ The S&P 500 index has rebounded over 13% from the June lows as many on Wall Street anticipate that the Fed will stop quantitative tightening next year and begin cutting interest rates. If the next couple of inflation and nonfarm payroll reports support the Fed pivot argument, we might stop hearing these bear market calls. ​

​Equities might struggle to keep the rally going as investors continue to see economic data that suggests the economy is still holding up and as US-China tensions simmer. ​ Wall Street has heard enough from the Fed to know that we are stuck in wait-and-see mode for the next 48 days. ​ The September 21st FOMC decision will have a clear trajectory from both labor market and inflation data points. ​

Jobless claims

Application for US unemployment insurance continues to rise, an expected sign that the labor market continues to cool. Initial jobless claims rose by 6,000 to 260,000, in-line with expectations, while continuing rose more than expected to 1.416 million. ​ The Fed might pay closer attention to continuing claims, which could refute the argument that the labor market is still very strong as people should be able to easily find jobs.

Walmart’s news of the reduction of hundreds of corporate roles did not come as a big surprise given the pessimistic profit outlook. Layoff announcements seem to be a growing theme across corporate America but as long as the number of job openings remains roughly 50% above pre-pandemic levels, the Fed’s fight against inflation won’t ease up.

BOE

With inflation nearly 5X their target rate, the BOE needed to deliver a half-point rate increase today. ​ With a tight labor market, the BOE should be positioned to continue to deliver massive rate increases even as growth slows. ​ The UK economy does not look like it is positioned for a prolonged downturn, so that should allow the mostly hawkish BOE to be aggressive with tightening.

The biggest rate hike in 27 years was supported by eight MPC members, one voted for only a quarter-point increase. ​ The BOE’s outlook stole the spotlight as they see the economy falling into a recession from the fourth quarter of this year. ​ The warning of a long recession will complicate policy over the next year. ​ The bank also sees an inflation peak above 13% later this year and for it to stay around 9.5% in the Q3. ​ The most noticeable reaction was with the 2s- 10s yield curve inversion, which was the first time that happened since 2019.

With the latest polls showing Liz Truss widening her lead, expectations for some higher inflation will go up as some tax relief will prove to be inflationary.

Oil

The oil market is a mixed bag as demand destruction is met with limited spare capacity. ​ Ongoing weakness should be unlikely since the oil market remains tight, but the break of key technical $90 level could unleash some momentum selling. ​ WTI crude should have seen massive support at the $90 a barrel level, but an intensifying global economic slowdown is changing that oil market is tight trade. WTI crude should see some support at the $88.75 if this breach of the $90 level holds.

Weakening economic data from the UK and Germany kept oil heavy early, but buyers clearly emerged. Oil price weakness should be limited from here as energy traders know that China’s demand for crude could bounce back anytime soon and that the SPR release will end in the Fall. If the energy markets remain in doom and gloom demand mode, oil could fall another $5, but that should not be the base case.

​Earlier, the Saudis raised September prices to record levels for Asia. The increase of Arab light crude was 50 cents, which was less than the $1.50 increase some energy analysts were expecting. ​ The Saudis are keeping the oil market tight and that should eventually provide some support for crude prices. ​ ​

The resumption of Iran nuclear deal talks will closely be watched to see if negotiators can break the impasse. Energy traders have watched this movie before, and no one will start pricing extra barrels of Iranian crude to hit the market before the end of the year.

Gold

Gold continues to rally as geopolitical tensions won’t be going away anytime soon and as central bankers worldwide brace for recessions. ​ The BOE had a rather gloomy outlook and the Czech central bank (CNB) surprised markets by halting their rate hiking cycle.

Gold’s rallying as Wall Street becomes fixated with a global economic slowdown that will get much worse by year end.

Crypto

Bitcoin has been consolidating below the $24,000 level over the past week as crypto volatility remains depressed. Bitcoin’s correlation with equities remains, but over the past few sessions it has underperformed. ​ An increase with Fed rate hike expectations has capped how high Bitcoin can go for now, but as long as traders remain confident that the peak in Treasury yields remains in place, Bitcoin may have bottomed already. ​ A choppy consolidation might be in Bitcoin’s future until we see a couple more inflation and nonfarm payroll reports.

​Calls that crypto is dead have been overdone. In fact, crypto is alive and well. ​ BlackRock has partnered with CoinBase to make crypto available to institutional investors. ​ This is a much needed positive news for crypto traders and should provide some optimism for the longer-term health of the cryptoverse.