Final Piece of the Puzzle

This is a make or break week for global financial markets.

Global sentiment still emanates from Wall Street, and this week the US sees the ‘last rate hike’, Q2 GDP, and PCE data. As well as big tech earnings. All set the scene for the way forward for US equities in a big way.

The US economy will confirm its slowing trend through the release of this week’s GDP data. Which could show the second quarter performed reasonably, but at a much slower 1.6% pace. It is not the number, albeit weak in its own right, but more the conformation of the trend many of us have known was there for some time.

The unspoken suggestion from the GDP will be that this current third quarter is likely to be yet lower again. The continuation of the weakening cycle which has been evident for some tome across many sectors of the US economy could even see contraction in Q4.

The ‘Big Show’ of the week is of course the FOMC. Where the Federal Reserve is likely to announce a further rate hike of 25 points. The big hope is of course that this is the last one of its kind. The accompanying statement is likely to indeed point out that the Fed could well be done for now.

The surprise however, may well be that the statement and comments go on to highlight that with core inflation stubbornly still near its peak, and in fact re-accelerating, as well as the recent upward trend in global energy and food prices again, all require the Fed to maintain a very firm tightening bias indeed. That the Federal Reserve remains ready to hike rates again if necessary, could be a bit of a shock for some commentators.

Perhaps, even a ‘pin to the ballon’ moment.

Meta is already displaying major top seen price action, and Apple has begun to slip in recent days too. There will be some big reporting of earnings this week. With the market having been so bullish these stocks this year, with so much unrealised profit sitting on the table, even good outcomes could be seen by some as an opportunity to take profit.

If earnings were to disappoint at all, I think it is reasonable to suggest the market is vulnerable to downward correction among these stocks. It could be a case of ‘buy the rumour, sell the fact’, or even more simply ’the party may be over, it's time to get out’?

So the mix of Fed commentary and these earnings results, is indeed something to watch this week.

Then there will be the PCS data. This should be moderating leaving the current Fed outlook of this being the last hike just about right. Should the PCE be above expectations however, then it all becomes a rather worrying matrix of developments.

What the market still seems unready to accept is that the Fed Funds Rate is going to remain at current levels for the next 12-18 months.

This may be the last hike of the current tightening cycle, but what if it is not the last cycle still higher?

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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