The weekender: Back to the cat-and-mouse game

Markets

After a quick peek in the soft landing camp mid-week, investors retreated as US stocks traded lower on Friday to end the week more or less unchanged. Investors are increasingly concerned that the latest flurry of data points to firming inflation and perhaps a higher-for-longer rate environment that could weigh on the heavily Mega CAP Tech concentrated S&P 500 Index.

Investors were inundated last week and could be suffering a case of data paralysis, which, in summation, seems to point to accelerating inflation and still-firm growth, indeed the harbingers of a hard landing -- and while some will argue the economy is on course for a soft landing; nonetheless, it may be one accompanied by higher-for-longer rates, perhaps. Indeed, yields on 10-year Treasuries are trending up a few bps to 4.32% -- near the top of the range we have seen this cycle.

With rates up, Mega Cap Tech companies, including Nvidia Corp. and Meta Platforms Inc., experienced significant losses, exceeding 3.5%. This downward pressure from the tech giants led to unfavourable movements in the stock market, with the S&P 500 erasing gains made earlier in the week and the Nasdaq 100 dropping nearly 2%.

Indeed, it’s back to the cat-and-mouse game as the resumed drive higher in rates has injected some turbulence into the US equity market. The intricate dance between these variables has historically created a complex landscape for traders and investors, introducing increased volatility and challenging the trading environment.

And frankly, emerging concerns about the potential economic impact of a strike initiated by the United Auto Workers are not really helping matters.

As investors set the stage for what is widely expected to be a hawkish hold for the Fed next week, in the run-up and probably in the aftermath, price action is expected to be uneven and choppy, without a clear overall direction at times. Then, we'll enter a seasonally strong Q4 period with numerous factors in play, including a potential resurgence in US core CPI due to seasonality factors, health insurance premiums, and upward pressure on core services ex-housing

So the story coming out of this week may be more like FIRMER growth + FIRMER inflation... at least for now.

Forex markets

The recent ECB rate hike marked a significant move, but the central bank's accompanying signals have hinted to the markets that this tightening cycle is concluding. Consequently, the sensitivity of EUR/USD to the dollar and US economic data is expected to be heightened.

In a separate development, media reports suggest that some Bank of Japan (BoJ) members have expressed reservations and pushed back against hawkish interpretations of comments made by Ueda earlier this week. Hence, the USDJPY is tracking toward 148.00. 

Furthermore, there is a growing sense of optimism among a subset of investors who believe that Beijing's recent efforts to stimulate the economy and stabilize financial markets yield positive results. This optimism is a slight positive for the Euro and could slow the EURUSD sell-off.

However, The US dollar might maintain its strength in the lead-up to and following the Federal Reserve meeting this week. All eyes will be on the dot plot projections, and if the trend of rising inflation persists, as it has been, there's a potential for upward revisions in the 2024 projections. This implies that the US dollar is less likely to weaken over the near term unless there's a significant disappointment in US economic activity data that contradicts the Fed's expectations and hints at a slower economic recovery. In such a scenario, we might see the dollar's strength wane, but until then, it could remain robust.

FX view

The contrast between the Federal Reserve (Fed) and the European Central Bank (ECB) in their recent forecasting rounds provides a valuable lesson for foreign exchange (FX) investors. The ECB adjusted its headline inflation forecasts upward while revising its growth projections downward. In contrast, Fed officials are expected to do the opposite in their upcoming meeting, revising inflation forecasts downward despite observing more robust economic growth.

The critical tactical question for investors is how long FOMC officials believe this trend for FIRMER growth and FIRMER inflation will persist. Market reactions to the ECB's actions have highlighted that FX markets are primarily concerned with the forward policy trajectory. Likely, the Fed won't be able to definitively close the door on further rate hikes or credibly signal the possibility of imminent rate. This stance would probably support the recent strengthening trend of the US dollar. FX investors will closely monitor the Fed's guidance in this context to gauge the currency's future trajectory.

Oil markets

West Texas Intermediate (WTI) futures, traded on the New York Mercantile Exchange, concluded the Friday session at a fresh 10-month high of $90.77 per barrel (bbl). This price surge was driven by declining inventories at the Cushing supply hub in Oklahoma, which serves as the delivery point for the US crude benchmark. It was further amplified by recent forecasts indicating a deepening global supply shortfall expected in the fourth quarter. This supply shortage is primarily a result of extended supply cuts implemented by major oil producers, Saudi Arabia and Russia.

ULSD (Ultra-Low Sulfur Diesel) and RBOB (Reformulated Blendstock for Oxygenate Blending) futures on the New York Mercantile Exchange (NYMEX) experienced a decline in prices during Friday's session after encountering resistance. The downward movement in these energy futures contracts may be attributed to emerging concerns about the potential economic impact of a strike initiated by the United Auto Workers (UAW) against the major U.S. automakers, including General Motors, Ford, and Stellantis NV. Such labour strikes can disrupt production and supply chains, leading to uncertainties in energy markets and contributing to selling pressure on futures contracts.