Fed looks to raise rates despite signs of cooling inflation
Stocks fell Thursday as investors grew increasingly concerned the Federal Reserve will keep raising rates despite signs of slowing inflation.
The Dow Jones Industrial Average lost 0.8 per cent, giving up its gains from the new year rally. The S&P 500 also fell 0.8 per cent and the Nasdaq Composite shed almost 1 per cent; however, both are still positive for the month.
All of the major averages are on pace for a negative week. The Dow is down 3.66 per cent, while the S&P and Nasdaq have each lost more than 2 per cent on a weekly basis.
To S&P500 sectors, mostly performed weaker overnight. Energy was the top performer, up by 1.1 per cent, whilst industrials was the worst, down 2.1 per cent.
Netflix has reported their earnings overnight. They have missed out on earnings, but have recorded an additional 7.66 million global subscribers compared with the 4.57 million subscribers that they expected.As such, their share price closed 8 per cent higher.
Overall, overnight’s performance came after initial filings for unemployment insurance fell to their lowest level since late June last week, the Labor Department reported, signalling to investors that the labour market is resilient amid a slowing economy.
Ed Moya, senior market analyst with currency data and trading firm Oanda commented, “The labour market needs to break to allow the Fed to comfortably keep rates on hold.”
Investors have been parsing other recent economic data and Fed remarks for clues on how high rates will go. But, while recent numbers point to easing inflation, JPMorgan Chase CEO Jamie Dimon thinks rates will top 5 per cent. “I think there’s a lot of underlying inflation, which won’t go away so quick,” Dimon told CNBC’s “Squawk Box” from the World Economic Forum in Davos, Switzerland.
Elsewhere, investors are watching key quarterly reports to see if there is an earnings recession brewing.
There are a few dynamics behind the recent deterioration in risk sentiment.
The biggest issue seems to be some dent in the momentum behind the soft-landing narrative with the string of negative US macro surprises.
The disappointing earnings/guidance also plays into growth concerns as more companies flag heightened macro uncertainty, softening demand and destocking.
There are some corporate layoff announcements playing into the growth concerns as well, after seemingly attracting some positive spin via economic normalisation and profit margin protection.
At the same time, Fed officials have stuck with their higher-for-longer messaging and pushed back against some of the disinflation enthusiasm.
There are also some doubts about the credibility of the recent rally given the marked outperformance of most-shorted baskets.
To commodity news, market participants stated that copper bulls that are betting on a strong recovery of physical demand after the Chinese New Year should be wary of getting carried away, as Reuters reports. Note that a rally driven by sentiment and expectations, without an actual increase in consumption, could trap investors in an eventual sharp downturn, such as the one during mid 2022 triggered by the Ukraine-Russia war and an energy crisis. Jefferies analyst believe that China's reopening could easily drive the demand by 100,000-200,000 tonnes, enough to flip the supply-demand forecasts into a deficit.
Elsewhere, supply side concerns remain in place for 2023 in Chile and Peru, which accounts for around 30 per cent and 10 per cent of global mining supply respectively.
BHP (ASX:BHP), have said that China would act as a “stabilising force” for commodity demand this year as Beijing’s pro-growth policies offset weak economic performance in other developed markets. The company said on Thursday that China’s reversal of Covid-19 restrictions and stimulus for the property sector, a key driver of iron ore demand, would support “progressive improvement from the difficult economic conditions of the first half”.
NSW is set to introduce a domestic coal reservation policy to alleviate the energy crisis
The Australian reports that NSW Treasurer Matt Kean is looking to order thermal coal miners to reserve up to 10 per cent of their output for NSW power stations by the end of month in an attempt to avoid shortage in supply.
This is an expansion to the rules introduced in December requiring some coal miners to reserve production, on top of a A$125-a-tonne cap on coal price sold to local power providers.
The Australian speculates that this could include major producers like BHP, Whitehaven Coal and Yancoal.
Futures
The SPI futures are pointing to a flat start.
Currency
One Australian dollar at 8:10 AM has weakened compared to the US dollar yesterday buying 69.11 US cents (Thu: 69.39 US cents).
Commodities
Iron ore futures are pointing to a 0.17 per cent gain. Iron ore is 1.8 per cent higher at US$124.95 tonne.
Gold added 1.4 per cent. Silver gained 1.5 per cent. Copper added 0.4 per cent and oil added 1.4 per cent.
Figures around the globe
Across the Atlantic, European markets closed lower. London’s FTSE fell 1.1 per cent, Frankfurt dropped 1.7 per cent and Paris dropped 1.9 per cent.
In Asian markets, Tokyo’s Nikkei lost 1.4 per cent, Hong Kong’s Hang Seng fell 0.1 per cent and China’s Shanghai Composite closed 0.5 per cent higher.
Yesterday, the Australian sharemarket added 0.6 per cent to close at 7,435.
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Sources: Bloomberg, FactSet, IRESS, TradingView, UBS, Bourse Data, Trading Economics, CoinMarketCap.
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