Equity markets gave up solid gains late last week alongside a decent run of economic data. But, when moderately solid economic data and a slight uptick in headline CPI get compounded by another move higher in oil prices, it starts rousing those inflationary heebie-jeebies, which are typically accompanied by a push higher on US yields, negative for long-duration Mega Cap Tech.
Big tech companies, including Nvidia Corp. and Meta Platforms Inc., experienced substantial losses, with both seeing more than 3.5% declines. Given the colossal concentration risk, the slumping tech sector weighed on the broader market, resulting in the S&P 500 erasing its weekly gains and the Nasdaq 100 slid by 1.8%.
The upcoming Federal Reserve policy decision scheduled for Wednesday is a significant focal point for investors, contributing to the cautious sentiment in the market as they await the central bank‘s decision and its potential implications for the broader economy and financial markets.
Asian equities appear poised for a downbeat day as they follow the tech-led declines witnessed on Wall Street on Friday. Local investors are gearing up for an eventful week, including meetings by the Federal Reserve and the Bank of Japan. Both policy meetings could introduce additional uncertainties into the market due to possible hawkish leans.
Similar to the moves in US equities on Friday, this anticipation likely contributes to the cautious sentiment among Asian investors as they evaluate these central bank meetings’ potential outcomes and impact on global markets.
Federal Reserve officials have indicated that they can proceed cautiously at this juncture. During their September meeting, they plan to keep the target range for the federal funds rate unchanged at 5.25-5.5%. The critical question for the markets is whether the median dot in the dot plot will still project an additional rate hike this year, potentially to 5.5-5.75%, possibly in November.
Economists surveyed by Bloomberg News anticipate the resilient US economy will lead the Federal Reserve to project one more interest rate hike this year. Furthermore, they expect the Fed to maintain interest rates at the peak level for a longer duration into the next year than anticipated. This outlook suggests that the Fed may continue its efforts to combat inflation and gradually normalize monetary policy as it monitors economic conditions and inflationary pressures.
Any dovish deviation could encourage the markets to sell the dollar and hammer Treasury yields lower. Such a move would undermine the Fed’s efforts and credibility to combat inflation. Conversely, implementing a 25 basis point rate hike could be perceived as inconsistent with the Fed’s objective of engineering a soft landing and may adversely affect risk appetite. The Fed faces a challenging balancing act as it navigates the delicate economic landscape.
Besides the ongoing cat-and-mouse game between rates and tech stocks, which always injects some turbulence into US equity markets, the US faces two new challenges impacting its economic landscape.
First, there is the looming threat of a government shutdown, which has the potential to dent confidence and hinder economic growth. Second, an unprecedented strike involves all three legacy Detroit automakers—Ford, General Motors, and Stellantis.
This strike occurs amid a resurgence of labour activism in the United States, departing from decades of declining labour union influence. Unionized workers feel emboldened, driven by a tight labour market, inflation concerns, and the risks they bore during the pandemic.
While the strike is unprecedented, as it simultaneously targets all three major automakers, it currently involves fewer than 13,000 workers.
Depending on the duration and scope of the strike, it can disrupt economic expansion and complicate the central bank’s efforts to achieve a soft landing for the economy.
Although the current walkout may not significantly influence the Federal Reserve’s monetary policy decisions, labour disputes can spread through other unions and industries. The outcomes of such negotiations are often closely watched by other labour leaders, as they can set precedents for wage and labour conditions. If the strike by workers at Ford, General Motors, and Stellantis results in favourable terms, it may encourage other unions to pursue similar demands, leading to potential labour unrest in various sectors of the economy, if not globally. This broader labour movement and any resulting disruptions could negatively affect the overall economy and potentially influence the Fed.
