US stocks sold off during early September US August CPI data surprised to the upside, keeping a hawkish Fed on track for further jumbo-sized rate hikes moving forward. This dampened optimism for a less aggressive Fed. August US retail sales also rose unexpectedly by 0.3% month on month and initial US Jobless Claims surprised with positive news, signaling a resilient US labor market. The strong economic data has convinced traders that the inflation will continue to run hot, as long as the economy goes well and Fed Funds Futures traders are pricing in a 77% chance for a 0.75% hike and a 23% chance for a 1% hike in September.
It seems like we need poor economic news or a worsening global recession in order to convince the investors that the economy is slowing, inflation is coming down and the US Fed will take a less aggressive approach in raising interest rates.
The good news is that... the bad news are starting to roll in. An unexpected decline in August Industrial Production and a surprise contraction in the Philadelphia Fed Manufacturing Index fueled recession fears. FedEx, One of the largest courier company in the world and bellwether of the US economy reported poor earnings and is expecting the global economy to get worse in months to come.
“Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S. We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations,” said Raj Subramaniam, FedEx Corporation president and chief executive officer in a release. “While this performance is disappointing, we are aggressively accelerating cost reduction efforts and evaluating additional measures to enhance productivity, reduce variable costs, and implement structural cost-reduction initiatives. These efforts are aligned with the strategy we outlined in June, and I remain confident in achieving our fiscal year 2025 financial targets.”
As we get more and more negative news in the coming months, this slew of bad news may be the catalyst to drive a new market rally, which is one big irony, in today's stock market.
China continues COVID lockdown. Ukraine takes back land.
The cities of Chengdu and parts of Guangzhou and Shenzhen were struck by COVID and saw these 2 economically important cities being locked down. Even though China's president Xi Jiping attended a number of high profile events, there is no indication from him or any of the high level leaders that the zero COVID strategy will end anytime soon.
Meanwhile, Ukraine mounted a strong counter attack and took back the entire region around Kharkiv, in a show of strength that the Ukrainian army has the capability to break the stalemate and take back territory. This gives rise to the hope that Ukraine may be able to end this war earlier than expected if they can keep up with the momentum, but at the same time, giving rise to fears that Russians may use more forceful methods such as tactical nuclear weapons, in a bid to change the tide of the war. However, the probability of such a scenario is considered to be low, as the use of tactical nukes may result in a forceful military action by NATO and possibly losing support from China and India.
Portfolio Strategy
The market rally that started in July grinded to a sudden halt, thanks to positive economic news. The cash portfolio lost 0.61% and the CPFIS portfolio lost 2.05%. I will expect the stock market hold the ground and probably rally, as more and more negative economic news stream in, giving a strong signal that consumers are slowing down their purchases, allowing inflation to cool and giving the US Fed room to allow for a more gradual increase in interest rates. There will be no change in the portfolio allocation as the portfolio is positioned to take advantage of the market rally, when it comes.
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