Yeah go to Jackson, go comb your hair
We raised the question earlier this week, would weaker economic data be good for stocks as it could be the catalyst for a more dovish Fed and helped by falling bond yields? Or be the catalyst for a renewed selloff. The jury may be still out on this one, but early indications are that weaker data is leading to weaker stock markets, as one should expect. Yields in US treasuries have fallen this week as the flash purchasing manager composite index for developed markets appears to indicate that developed economies have fallen into contraction, at least according to Capital Economics estimates. As well as the weak PMI reports, the latest US Durable Goods orders report underscores how high borrowing costs, stiffer credit terms and lingering economic uncertainty are curbing firms’ desire to pursue longer-term capital investments. Despite the weaker economic data, the US dollar basket rallied this week.
The sector moves reflected the defensive nature of yesterday’s moves. Consumer staples and healthcare holding up better than some more cyclical ones. Nvidia’s much-anticipated results were actually the catalyst for something of a sell-off in tech. Although the initial indications were that investors cheered the raised guidance for the coming year, a company trading on 45X its forecast sales has already discounted some of that growth. Nvidia’s stock finished flat on the day, the broader Nasdaq index fell over 1%.
Later today we will hear from Jerome Powell as he speaks at the annual symposium of bankers in Jackson Hole. It’s possible that ever he says may not be great news for stocks. Strike a more dovish tone may suggest that he is more cautious about the outlook for the US economy, remain hawkish and markets will see rates higher for longer. The probability is he will tread a fine line between the two and remain fairly non-committal as he will reuse the well-worn phrase of being data dependent.
The natural course of events in the economic cycle in response to a more restrictive monetary stance is, over time a slowing of the economy, bond prices start to rise as growth slows and stocks fall. The threat of inflation goes away, and at some point the central bank starts to cut, bond yields fall further, and stocks are slow to react and may indeed continue to weaken, at some point as monetary stimulus kicks in the recovery begins and stocks recover. The question is how dramatic are the moves? That will depend on the steepness of the decline in the economy and the relative value of stocks and bonds.