Once again Australian investors have been caught on the hop with regard to a key market trend changing – Friday’s 0.3% rise in the ASX 200 was completely out of synch with Wall Street’s big selloff on Friday night after another measure of inflation shocked on the upside and other data suggested the economy was stronger than previously thought.
All that suggests the Fed will lift interest rates and keep them higher for longer, as chair Jay Powell has been saying now for several months – but has been ignored by investors.
Friday’s Personal Consumption Expenditure and inflation data shocked with higher readings for personal income, consumer spending and inflation – which hit the highest level since the June 2022 peak.
That possibility of a surprise reading later in the day in the US was ignored by local investors on Friday.
But they must have been worried because despite the day’s gain of 21.6 points to a closing level of 7,307, the ASX 200 still lost 0.54% last week.
But that was far short of the realities we saw on Wall Street where the major measures shed as much as 3% of their value by Friday’s close for the worst week of trading in 2023.
The Dow shed 336.99 points, or 1.0%, to end at 32,816.92; the S&P 500 fell 1% to close at 3,970.04 and the Nasdaq dropped 1.7% to finish the week at 11,394.94.
At one stage the Dow was off 510 points, or 1.54% in early trading after the worse than expected data on consumer spending and inflation was released before markets had opened.
The data saw the major averages also ended the week with their biggest losses in 2023.
The S&P 500 was down 2.7%, its worst week since December 9. The Dow fell almost 3.0% last week — its fourth straight losing week and the Nasdaq dropped 3.3% lower for its second down week in the past three.
The US data rattled markets globally – the MSCI world equity index, which tracks shares in 50 countries, shedding 1.17% on Friday. European stocks fell 1.04%.
US Treasury yields jumped, with 10-year yields hitting 3.945%, and two-year yields, which are highly sensitive to Federal Reserve policy, rising as high as 4.8156%, the highest since in nearly four months.
This saw the US dollar hit a seven-week high on Friday, which further unsettled markets.
This is why the ASX 200 will be down 50 points or more at the opening later today as local investors rush to play catch up the sentiment change on Wall Street – which was not so much a change, more an eventual realisation that the slowing US economy and ‘generous’ Fed would gift Wall Street a slowcession, as Moody’s economists have called it
Last week, and especially Friday well and truly ended the belief US interest rates were close to peaking, that the economy was weak and that this would see the Federal Reserve taking its foot off the monetary policy brake pedal.
Since late 2022, investors here, in the US and elsewhere have come to believe in the fairy tale that a decline in high inflation would be something of a straight-line fall which would bring the rate back from the peak of 9.1% last June to the Fed’s target of 2% (and 2% to 3% here for the Reserve Bank, even though there’s no sign of a peak in local inflation).
They ignored the strong possibility that inflation would prove to be slower to fall, that the gentle and continuing easing was plain wrong and that cost pressures would prove to slower to ease than predicted – or as the jargon goes, that inflation would be ‘sticky’.
January’s Consumer and Producer Price Indexes showed that and the January jobs data and surge in personal income to the highest monthly gain for some time, confirmed it – but that was ignored. Friday’s Personal Consumption data confirmed the ’stickiness’.
Consumer spending, which accounts for more than two-thirds of US economic activity, jumped 1.8% last month, the US Commerce Department showed on Friday. Moody’s economists had been looking for something smaller, like so many other economists.
Adding to the concerns, the data for December was revised higher to show spending dipping 0.1% instead falling 0.2% as previously reported. Economist polls had forecast consumer spending rebounding 1.3%.
Driving spending was the 8.7% cost of living adjustment, the biggest increase since 1981, for the more than 65 million Social Security beneficiaries in the US, which boosted income overall.
Taken with the very strong January employment data (and the higher income from more than half a million newly employed, the surge means consumer spending and the US economy have had a much stronger start to 2023 than anyone had forecast.
It was probably no wonder that the personal consumption expenditures (PCE) price index (favoured by the Fed), jumped 0.6% last month, much quicker than the 0.2% rise in December. In the 12 months through January, the PCE price index accelerated 5.4% after rising 5.3% in December.
Excluding volatile food and energy, the PCE price index increased 0.6% after climbing 0.4% in December. The so-called core PCE price index increased 4.7% on a year-on-year basis in January after advancing 4.6% in December.
That has seen not only most US economists now switch sway from the Fed easing idea to rates remaining higher for longer with some believing that inflation can’t be stopped without slowing the economy to a halt of a recession.
Liz Ann Sonders, chief investment strategist at Charles Schwab, believes there is more to the market’s downturn besides the PCE numbers.
“Another reason why the market is having trouble to some degree, I think, is not just about inflation being hotter or concerns that the Fed has to stay tighter for longer,” Sonders told Reuters on Friday.
“But there was just a lot of speculation that kicked back in —speculative froth. And the market tends to move in a contrarian fashion when sentiment gets a little too frothy. So I think some of the move has to do with sentiment. Not just these macro forces,” she added.
The strategist believes that inflation cannot come down without a broader economic downturn.
“I think something would have to give either broadly in the economy, or more specifically in the labor market, to bring the immaculate disappearance of inflation,” Sonders said. “Without that commensurate hit to the economy or the labor market, I think it’s a stretch.”
“It puts the final nail in the coffin in the shift we’ve seen the last several weeks where the market has come around to what the Fed has been saying for a while: rates above 5% and there for longer,” said Ross Mayfield, investment strategy analyst at Baird.
