The big question is how frightened the stock market is or can get

The big question is how frightened the stock market is or can get

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Outlook: Today it’s US new home sales, likely to cement the sentiment of a housing recession. A Bloomberg headline reads “home sellers are slashing prices.”

After the as-expected eurozone flash PMI, we get the flash PMI for the US, along with July durables and the revision to Q2 GDP (yawn). The big day is going to be Friday–we get the advance trade report and personal income and consumption, which will be used to create the PCE deflator (and set off the usual debate about headline vs. core). We also get consumer sentiment. During the week, it’s a lot about Germany–GDP, IFO, GfK.

The big question is how frightened the stock market is or can get. The S&P was just repelled from the 200-day moving average. The markets finally accepted the inevitable–the Fed is, indeed, serious about tightening. Reuters credits hedge funds. Is it the end of the bear market rally? Maybe, maybe not.

We may get some whispers at or on the sidelines of the Kansas City Fed shindig at Jackson Hole (Aug 25-27). Oxford Economics is sticking to its forecast of aggressive tightening. “The debate at the September FOMC meeting will be between a 50bps or 75bps rate hike. Either way, we still expect another 125bps increase in the fed funds rate by year-end, lifting the mid-point of the range to 3.63%.” Well, we had the close yesterday at 3.037% and the recent high on June 14 at 3.349, so it’s plausible.

We try to avoid alarmism, but it’s getting harder to do. We can’t measure it, but one source of less angst in the US has been falling and tame oil prices and its progeny, gasoline prices. If we see numbers well over $100 again, consumer sentiment is sure to crash and have a knock-on effect to inflation and consumer spending (which is, after all, two-thirds of the economy). We will probably see German sentiment already there, considering the energy punishment the economy is taking and the outlook for a grim winter.

While it may seem Europe is the biggest sufferer, the UK is right up there, too. This week the cost of energy is going to jump higher as the regulator, named Ofgem, raises the cap on what suppliers can charge. Bloomberg reports “In early August, Ofgem warned a challenging winter lay ahead. Analysts’ estimates point to an increase of about 80%, a reflection of record gas and power prices.”

The cap applies to most households and is “expressed in terms of average energy bills, not an absolute ceiling. That cap is forecast to be raised on Friday to £3,554 ($4,185), effective Oct. 1, according to Cornwall Insight Ltd. That’s up from £1,971 in force since April.” And it ain’t over yet. The cap will be reviewed every three months starting in October.

“With no end in sight to Russia’s war in Ukraine and wholesale gas prices jumping more than 60% so far in August alone, analyst forecasts for future cap levels are constantly getting revised. Cornwall Insight predicts that the price cap will soar further to peak above £5,300 in the second quarter of 2023 and remain above £4,700 throughout 2023.” The government has a discount of £400 to subsidize, but it’s hardly enough. The median UK household disposable income (after taxes and benefits) was £30,800 in 2020. Even if it’s 10% higher today, a utility bill of £5,300 is preposterous.

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The US is not going to face energy price inflation of this magnitude and that’s a factor in the dollar rally. It’s hard to compare the climate change disasters–how comparable are the Rhine, Po and Loire Rivers to the Colorado? After all, the Colorado feeds California, the 4th largest economy in the world. And China’s Yangtze is falling hard, too. And while nobody can claim the US is more environmentally friendly, it is more energy independent and also food independent. It’s not silly to say this is a factor in the dollar rally because other countries are getting recessionary fast and will struggle to keep up with rate hikes. We don’t see currencies moving in lockstep with yields these days, but at some point the differential comes back into play. The US is looking at 125 bp more by yearend while the ECB will be reluctant to do even the 50 bp it seems to be promising. This has to count against the euro.

All the same, even if we are not getting a classic pullback Tuesday, the dollar rally has to run out of steam sometime soon, if only for a little while. We can expect a bounce in the euro off the channel bottom (which stands around 0.9825 tomorrow). As for sterling, take a wild guess. We can’t find any reasons to like it, except maybe the stark honesty from the BoE with its forecast of double-digit inflation. But even if we get some pullback this week, by Friday the comments from Mr. Powell can drive the dollar up again, unless his expected hawkishness at Jackson Hole gets fully priced in. At some point the dollar becomes so overbought that the big traders are going to pare positions no matter what the data or important speakers have to say. Wariness is called for. Whenever it’s a fat dollar rally, don’t neglect the long-stranding anti-dollar bias. Tigers and stripes.


This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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