The Federal Reserve (Fed) ‘magic’ didn’t last long, and the US stocks recorded the worst day of the year yesterday, after posting the biggest gains of the year the day before, under the pretext that the Fed wouldn’t raise the rates by 75bp points.
Investors realized that the Fed announced the biggest rate hike in more than 20 years, and said that there will be more 50bp hikes in the coming meetings. As such, the Fed is expected to hike rates by 50bps at least in the next two meetings.
The S&P 500 dived more than 3.5% yesterday as 95% of the companies fell, and Nasdaq fell more than 5% to close below the 13'000 mark, as technology stocks were heavily hit. Apple (NASDAQ:AAPL) plunged more than 5.50% yesterday, Meta (NASDAQ:FB) lost 6.7%, while Amazon (NASDAQ:AMZN), which has been shattered last week on disappointing Q1 results, dived more than 7.5%. Other e-commerce giants including Etsy (NASDAQ:ETSY), eBay (NASDAQ:EBAY), and Shopify (NYSE:SHOP) added an additional layer of stress to the market warning investors that growth would be slowing due to high inflation and fading pandemic demand. And Etsy has been one of the biggest losers of the session with a 16.8% plunge, as, although the company managed to post better-than-expected revenue last quarter, the weaker-than-expected guidance, along with the overall moodiness in the market hit the stock price and sent it to the lowest level since June 2020.
Bitcoin didn’t resist to the risk selloff, and dived near $35'500 mark for the first time since February. Even Gucci’s announcement that it would accept payments in cryptocurrencies couldn’t improve the mood.
Energy did better
Energy stocks did better than their peers yesterday, as the barrel of US crude extended gains past the $110 on the back of timid production target increase from the OPEC, and the European plans to ban the Russian oil and gas gradually to the end of the year.
Occidental Petroleum (NYSE:OXY), for example, advanced 1.17%, Shell (LON:SHEL) rallied 3% after posting the highest quarterly profit since 2008, thanks to the rally in oil prices, and despite an almost $4 billion charge on its planned exit from Russia, while BP (LON:BP) and Exxon (NYSE:XOM) gave back some gains, but the losses were nothing compared to the index averages.
All eyes are on the US jobs data
Even though the Fed will turn a blind eye on softening jobs data in the coming months to focus on its fight against inflation, a strong NFP data could further revive the Fed hawks and the prospects of more aggressive Fed over the next couple of meetings, whereas a soft data could bring in some Fed doves.
But again, the Fed must make a choice as it can’t boost growth and tame inflation at the same time.
Wednesday’s ADP report disappointed as it printed less than 250’000 new private job additions versus around 400K expected by analysts, and the consensus of analyst estimates point at 400K new nonfarm job additions in April.
Wages growth will matter as higher wages mean more pressure on inflation. US wages may have grown 5.5% annually in April, with an unemployment rate seen down to 3.5% - quite a solid number that should justify the Fed not being concerned about the health of the jobs market for a while, to fight inflation.
Elsewhere…
Inflation in Switzerland hit 2.5%, the European producer prices printed a scary 36.8% and the consumer prices in the UK advanced 7%, as the Bank of England (BoE) warned that it should progress past the 10% in the coming months. The BoE raised the interest rates for the fourth consecutive meeting, but alas, the pound dived as the fear of higher inflation, and the warning of a possible recession before the end of the year sent Cable tumbling to around 1.2350 yesterday.
Meanwhile, the EUR/USD eased back below the 1.06 mark, as German factory orders plunged 4.7% in March due to the war, inflation, and disrupted supply chains, while the expectation was a 1% drop. And things are about to get worse with the abandon of the Russian energy. In this respect, the ECB, which is already much less reactive to inflation than its major peers, will stay as dovish as possible and that divergence between the policy outlooks will likely continue weighing on the EUR/USD. Medium-term traders already have parity on their radar, and the next natural target for the bears is the 1.05 psychological level.
If you think 10% inflation is bad, read this…
Turkish inflation officially hit 70% in April, and the unofficial inflation printed 156%. The lira didn’t move much against the US dollar as the exchange rate is being artificially kept steady by the officials, but the fact that the Turkish policy rate is kept at 14%, which is significantly lower than inflation (both official and unofficial) means that the pressure on the lira is growing, and the cost for Turkey to keep the lira steady against a globally appreciating US dollar is rising, hence rising the fear that Turkey may, at some point, abandon its actual monetary and FX, and FX-linked deposit policy.