Retail Sales Disappoint
On Tuesday, August 17, US stock markets corrected from their recent all-time highs due to worrying economic data and lacklustre earnings results from major US retailers. Retail sales disappointed, the core reading coming in at -0.4% to the market’s expectation of a -0.2% reading. The broader measure, which includes big-ticket items such as automobile purchases, came in at
-1.1%, much lower than the market’s expectation of -0.2%. Both metrics are sharply off the previous month’s readings of 1.6% and 0.7%, respectively. This has added to the fear that the US economy is slowing. The dip experienced by all major US indices came after the S&P 500 recorded five consecutive record closes.
FOMC Minutes Suggest Taper Sooner Rather than Later
The following day, we received the minutes from the recent FOMC meeting. The release of the minutes can often be a non-event, however, these particular minutes had the effect of rattling US markets even further by revealing that a taper of the Fed’s $120 billion in monthly asset purchases could come sooner than expected. The minutes also revealed that there is a disagreement between FOMC members, with some calling for a reduction in asset purchases this year, while others think it more appropriate to begin tapering in 2022.
New House Starts Stall, Philly Fed Index Drops
Other economic data which could be pointing towards a US slowdown includes the reduction in the start of new housing builds, down to 1.53 million from the previous month’s 1.65 million reading, missing the market’s expectations of a 1.60 million print. The Philly Fed Manufacturing Index also declined, dropping to 19.4 from last month’s 21.9 reading, severely disappointing the market’s expectations of a rise to 23.2.
All Eyes on Jackson Hole
Fed Chairman, Jerome Powell is expected to fill in the blanks left by the last FOMC meeting this coming Friday at the annual Jackson Hole symposium. The symposium is due to take place from Thursday, August 26 to Saturday, August 28 and is expected to provide some forward guidance as to what the path to reducing the central bank’s monthly asset purchases could look like. However, with delta variant cases on the rise in the US, it’s also likely that the uncertainty surrounding the pandemic may also provide an opportunity to kick the can a little further down the road. It is notable that the symposium, originally scheduled to be held at its usual venue in Grand Teton National Park, Wyoming is now to be a virtual meeting due to the aforementioned uptick in COVID cases.
The Technicals
Much was made last week over the fact that the S&P 500 has not corrected by more than 5% in more than 200 sessions, the longest such winning streak since 2016 when it went more than 400 sessions without more than a 5% dip. In its history, it has only accomplished such a feat on six other occasions. Investor sentiment seems to be changing every week, from confidence in the reopening, to worries over surging delta variant cases, the spectre of inflation, and a possible taper tantrum should the Fed mishandle its gradual withdrawal of monetary stimulus.
Thus far, when looking at the technical picture it seems as though investors have raced to buy the dip. The S&P 500 has not even managed to drop to the 50-day moving average (as it did on the previous 5 minor corrections) before being bought up. The sectors of the US economy currently leading this bounce include technology, utilities, consumer staples, healthcare and real estate, all of which seem to be the sorts of assets investors may want to hold if they fear that rising COVID cases could derail the recovery. This, of course, is likely to change again after delta variant cases peak, however, it’s interesting to note that the best performers are tech (a traditional risk-on sector) and utilities (a traditional defensive play and bond proxy).
At the time of writing, the Nasdaq and S&P 500 are leading this bounce, both are trading less than 1% off their highs, the Dow Jones Industrial Average is around 1.5% off its highs and the Russell 2000 is still threatening to break to lower-lows, having broken below its 200-day moving average on August 19 for the first time since September 2020.
All eyes are now firmly fixed on the Jackson Hole virtual event. Will Powell talk the markets down? Or will the uncertainty in the US economy and rising infections lead him to take a softer stance until further notice? Stay posted.
About HYCM
HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East.
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