The US markets have a spectacular run-up after the latest CPI data revealed cooling of inflation, triggering a relief rally over the last two trading sessions from the recent lows, as investors rushed to return to the markets after heavy selling earlier on recession fears. Investors are now betting that the Fed will pivot from its hawkish stance in the coming FOMC meetings.
However, I believe that the bear is still pretty much in control, as previous consecutive and aggressive rate hikes have yet to be fully reflected in the economy due to the lagging effects of rate hikes. Companies are already observing slowing demands and inventories build-up, amidst rising operating and financing costs. These have not been helped by global supply disruptions from resurgence of COVID-19 around the world and geopolitical conflicts that have shown no signs of easing.
Many big firms have announced shelving of investments and expansion plans, restructuring, freezing of new hiring and retrenchment to contain their costs, the latest being Meta Platforms, the parent of Facebook, Instagram and WhatsApp, that has suffered from drastically reduced digital ads revenue as advertisers hold back from advertising amidst falling orders.
Evolving geopolitical conflicts in Europe, continuing tensions around the globe, economies reopening and an approaching winter may also lead to higher crude oil and energy prices, reigniting the inflationary pressure. The Fed will be sure to monitor closely these global trends as they evolve and watch how they are affecting domestic prices.
Furthermore, the latest inflation data while having peaked and showing signs of cooling is still far from the 2% long-term target envisioned by the Fed. Though the Fed may slow down its pace and magnitude of subsequent rate hikes as inflation cools, until inflation has finally been tamed and brought to its knees, I doubt the Fed will let down its guard and pivot significantly.
Hence, I believe it is still early days to conclude that the market has turned around. The bear is still in control and may rear its ugly head on the next sign of rising inflation again.
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