- Q1 GDP Growth Jumps 1.1% on Strong Personal Consumption
- A Strong March Leads to a Surge in Chinese GDP in Q1 2023
- Durable Goods Retail Sales Suffer from High Interest Rates and Wary Consumers
- Choppy GDP Means UK Should Avoid Q1 Recession
- Japanese Consumer Confidence Jumps to Highest Level in Over a Year
- The End of Summer Sees the End of Disinflation in Europe
- Labor Market Indicators are Starting to Unify on Easing in Hiring
- Inflation and Tight Financial Conditions Weigh on the German Consumer
- Euro Area Money Supply Contracts for the First Time Since 2010
- Dismal Economic Data Out of Germany
- Core Durable Goods New Orders See Gentle Uptrend in July
- More UK Data Pointing to Q3 Decline
- Whispers of a UK Contraction in Q3
- Japan's Core Inflation Resumes Uptrend in July
- Early July Economic Data Leads to a Sharp Increase in Q3 Growth Expectations
- UK CPI: Energy Inflation Crashes but Services Inflation is Still Sticky
- China's Weak Start to Q3 Means More PBoC Easing
- A Breather for the Eurozone as Inflation Hits Two-Year Low
- Germany's September CPI Report: A Clearer Picture of Inflation Trends
- US Manufacturing Demonstrates Resilience Amidst Volatility in August
- The ECB Prepares to Address Excess Liquidity Through the MRR
- Bank of Japan is Too Optimistic on Inflation
- The Bank of England Pauses in a Near Split Decision
- UK Inflation August Update: A Precursor to the Bank of England's Announcement
- Housing Starts Tumble in August Amid Rising Mortgage Rates
- US Retail Sales Grow at Fastest Monthly Rate Since the Start of the Year
- US Consumer Prices Surge in August Driven by Energy Costs
- August NFIB Survey Showed a Tough Environment for Small Businesses
- All Signs Point to a Weaker Labor Market in August
- Chinese CPI Trying to Buck the Deflation Trend
- Energy Prices Rise but the Core Disinflationary Trend is Maintained in September
- PPI's Quiet Rise and the Energy Elephant in the Room
- Small Businesses Grapple with Inflation and Financial Strain in September
- A Wacky September Jobs Report Shows Strong Labor Market
- A Look at the Fragile US Labor Market Ahead of the Nonfarm Payrolls Report
- Thoughts on GME and This Week in the Stock Market
- Record Home Price Levels Point to Strength in Post-Pandemic Economy
- The Stock Market Looks Overvalued, but It's Probably Not
- China GDP Growth Surpasses Expectations
- President-elect Joe Biden Introduces His "American Rescue Plan"
- Political Polarization Intensifies with Another Impeachment Along Party Lines
- Metal Demand Has a Bright Future in 2021 and Beyond
- What Happened to That US-China Trade Dispute?
- Civil Unrest, A Rising Threat to the 2021 Economy
- What's in the $900 Billion Relief Plan?
Sour Expectations Take Down the Market
October 05, 2021
The Week Behind
Turbulence has finally hit the equity market after a rather quiet summer of expansion. This past week saw volatility build on the week before leading the S&P 500 down -2.21% and the Nasdaq Composite down -3.20%. Investors were in risk off mode as the seasonally weak September ended. Over the course of the month, the VIX index jumped over 40% while the S&P 500 index fell a total of -4.76%. It seemed about time for a correction, and pressure from various negative macroeconomic factors had built up over the summer.
Is it just a coincidence that stocks saw red in the week following the September FOMC meeting? Many wouldn't be surprised if we see another rendition of the "Taper Tantrum" that caused volatility in markets in 2013, and this could be investors' reactions they were looking for. Yields on 2-year, 3-year, and 5-year Treasury notes have all increased since the beginning of August as the bond market senses a Fed hawkish streak. There has also been some reaction in currency markets with the USD rising against other key developed markets that are expected to be more dovish in its policy normalization: up 2.02% against the EUR and up 1.16% against the JPY. It's also worth noting that these two countries have seen lower spikes in inflation.
Typically a rise in yields indicates expectations of healthy growth which has been the case for the most of 2021. COVID restrictions were lifted in the United States and most other developed nations which led to a boom in growth after the contraction in 2020. The expectations of a boom spurred on pent up demand fueled by excess savings from unprecedented governmental support to consumer and businesses. This had all created a healthy environment for equities to grow in the first half of 2021. However, that environment has more or less eroded in the short-term creating an instance where future growth is uncertain. In the Chart of the Week, one can see a massive dip in the sentiment of manufacturers, not due to demand issues but due to supply issues, and that has by and large been the main driver of the weakness in September trading.
So where do we go from here? We've already seen some stabilization in trading in the beginning of October. Two strong positive performances by the S&P 500 on Oct 3rd and Oct 5th seem to have stopped the bleeding at around 4,300, and the 2-year Treasury found a bottom as well around the 27 basis point level. Pessimism seems to have calmed. Zurich Insurance seems to agree, leading its monthly analysis with: "We believe investor pessimism is likely to ebb in coming weeks." It points out that the AAII survey signaled a "pervasive downbeat sentiment" that it is a "contrarian indicator." If we see a bounce from this position, it suggests that investors believe that perverse macro conditions are likely a temporary phenomenon.
Chart of the Week
The manufacturing PMIs from the Dallas Fed, the New York Fed, and the Philadelphia Fed measure firms current business activity and business activity expected in the future. This chart measures the spread between current conditions and future conditions. In September, the spread at 3.4 pts reached the lowest point since June 2006 when it was negative at -1.0 pts.
The Week Ahead
The labor report is still to come this week and will play a huge role in how the market sees the Fed's tapering schedule. The August jobs report was a bit of a disappointment, so a rebound is expected. Canada's labor force survey also comes out on Friday and will also serve as an indicator in how the Bank of Canada will proceed with tapering.