The dollar and stocks are falling as the market grapples with the Fed’s message
On Tuesday, August 23, the value of the dollar went down, and yields initially went down, as a result of data showing slower economic growth, which raised initial hopes that the Federal Reserve will back off its aggressive hiking of interest rates at its central bank symposium in Jackson Hole, Wyoming, on Friday, August 26. The symposium will be held at the end of this week.
In the later part of the trading day, however, yields went up and stocks went down as investors became more convinced that the Fed will stick to its hawkish message. This occurred despite the fact that market bets on how much the US central bank will increase interest rates in September went back and forth all day.
Gold ended a losing streak of six sessions as the dollar fell in value, and oil prices increased by almost 4% after Saudi Arabia suggested that the Organization of Petroleum Exporting Countries (OPEC) and its allies should reduce their production levels. Gold prices also rose as a result of the dollar’s decline.
In July, sales of new single-family homes in the United States fell to a level not seen in over six and a half years, and a survey from S&P Global showed its measure of private sector business activity fell to a level not seen in over 27 months. These results suggest that the Federal Reserve’s efforts to tame inflation are succeeding.
“The Federal Reserve has been fairly consistent in trying to sound as aggressive as it can,” said Marvin Loh, senior global market strategist at State Street in Boston. “The hawkish tone of the Fed’s statements has been fairly consistent.” Due to the fact that we were getting closer and closer to the end of the trekking cycle, the animal spirits were more willing to take risks during the summer.
However, Goldman Sachs said in a note that it expected Powell to reiterate the case for slowing the pace of tightening as indicated in his press conference in July and the minutes that were released last week from that meeting of policymakers. Goldman Sachs said this expectation was based on the fact that the minutes from that meeting of policymakers were released last week.
According to Goldman, Powell is expected to respond by emphasizing that the Fed “remains dedicated to driving inflation down and that subsequent policy decisions will depend on incoming data.” This will help to strike a balance between the two messages.
According to Bill Adams, the chief economist for Comerica Bank in Dallas, the economy of the United States appears to be on the verge of being hit with an energy price shock during the winter months, as natural gas prices have reached their highest level since 2008.
Because of the weakening of demand, another significant negative shock appears likely, and Adams believes that a recession is also more likely than not to occur between now and the middle of 2023, assuming one is not already begun.
The Dow Jones Industrial Average had a loss of 0.47%, while the S&P 500 suffered a loss of 0.22% and the Nasdaq Composite remained unchanged.
The yield on 10-year Treasury notes increased by 2.6 basis points to reach 3.061%, while the dollar index declined by 0.422% as a result of the euro’s recovery, which saw it rise by 0.24% to $0.9965.
The question of whether the Federal Reserve will raise interest rates by 50 or 75 basis points next month has caused significant volatility in the markets. Bets that were placed earlier in the day have been reversed, and now the probability of a lower hike is at 47.5%, while the probability of a larger climb is at 52.5%.
Earlier, the value of the euro dropped to fresh lows not seen in the last two decades. This came after reports indicated that economic activity in the eurozone shrank for a second consecutive month in August. This is due to the fact that the conflict in Ukraine is expected to ensure that the outlook for the European economy will remain bleak.
The fact that the Chinese yuan fell to a level not seen in two years and that the British pound temporarily approached a level not seen since March of 2020 helped the US dollar.
Despite the fact that the S&P flash composite purchasing managers’ index (PMI) of business activity in Europe was not as bad as feared, analysts said that more bad news for the economy is likely given how gas prices have surged to record highs ahead of the winter season.
Both the MSCI global market index and the STOXX index of European company shares concluded with losses. The STOXX index of European company shares has been in a downward trend for about a week.
The benchmark price of gasoline in the European Union increased by 13% overnight, reaching a new all-time high. Prices have more than doubled in the space of only one month, bringing them to a level that is 14 times higher than the decade-long norm.
A new interruption in energy supply coming from Russia was being prepared for by Europe.
The continued surge in European energy prices fuelled worries of recession, which in turn pushed bond yields higher while sending the euro to 20-year lows. On Tuesday, Asian markets fell for the seventh session in a row, which came following the resumed surge in European energy prices.
Anxiety regarding China’s economy continued to fester as a reduction in lending rates and speculation of a new round of official loans to property developers highlighted the difficulties that are now being experienced in the sector.
The value of the yuan has dropped to an almost two-year low, while Chinese blue chips have dropped by 0.5%.
After a PMI survey revealed that manufacturing activity in Japan had dropped to a 19-month low in August, the Nikkei experienced a loss of 1.2%.
The price of crude oil rose after Saudi Arabia issued a warning indicating that the OPEC+ producer coalition would reduce supply.
The price per barrel of US oil futures increased by $3.38 to end at $93.74, while the price of a barrel of Brent increased by $3.74 to $100.22.
The price of gold futures in the US ended the day up 0.7% at $1,761.20.