To The Moon

There was a relief rally on May 4 right after the Fed raised the interest rate by 50 basis points and calmed the market that it was not considering more aggressive hike of 75 basis points that originally worried the market. However, the relief proved to be brief as major US market indices recorded one of their greatest falls in recent months the following day. The market renewed its concern that the inflation would continue to surge and the economy would head into a stagflation. I believe that the market will continue its roller coaster ride throughout this year, as it sways between optimism on news of strong jobs data, continual consumer spendings and robust corporate earnings, and pessimism on news of stubbornly high inflation, heightening geopolitical tensions and worsening corporate outlooks. As the Fed has been far behind the curve, it is forced to front-load its rate hikes on its reversion path to rate normalisation. However, just as the Fed is caught between a rock and a hard place between suppressing a surging inflation and avoiding a recession, it will have to tread a fine line to avoid adverse outcomes in either case. If the economy is deemed to head for worse, and the market is pretty accurate in predicting that, the Fed is bound to soften its hawkish stance and narrative in order to reassure the market. It is also in the best interests of the US government to maintain market stability as the Fed fights the inflation, not least in case it loses its slim majority in the congress during the midterm election in November. I suspect the US may relook into the punitive tariffs imposed against the world factory China, so as to contain rising costs that may cost it precious votes. In summary, I expect the market to continue its roller coaster ride for the remaining months of this year, but narrowly avoid running into a recessionary trough. Next year though will be more difficult to predict, as an unsuccessful soft-landing of the US economy and unfavourable outcome from the election resulting in a dysfunctional government may well trigger a stagflation.

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