Daily Market Comment – Dollar stands tall ahead of upcoming Fed decision, equities resume slide

  • Dollar stays strong as bets of 100bps Fed hike remain on table
  • US retail sales rebound, initial jobless claims fall
  • Equities resume drop on hike bets and rising recession fears
  • Oil slides on agreement to avert a rail strike

Investors maintain bets of a 100bps Fed hike

The US dollar stood tall against most of the other major currencies on Thursday and during the Asian session Friday, with traders maintaining their bets with regards to an even more aggressive Fed elevated.

Following the hotter-than-expected CPIs on Tuesday, market participants put on the table a full percentage point hike for next week’s gathering, currently assigning a 25% probability for such a case, with the remaining 75% pointing to a third consecutive triple hike.

Yesterday, retail sales rebounded more than expected, with the highlights of the report being purchases of motor vehicles and increased demand for dining out amid lower gasoline prices. The July print was revised down to reveal a slide instead of being unchanged, but with other data showing that initial jobless claims fell to the lowest in more than three months, consumer spending might stay supported in the foreseeable future due to a persistently strong labor market.

Given their expectations with regards to the Fed’s future course of action, maybe that’s what most investors believe as well. Nonetheless, the fact that they are betting on a full percentage point may have increased the risk of disappointment at next week’s gathering if the Fed delivers another triple hike.

Having said all that, with some participants still expecting a rate cut as soon as next year, a Fed committed to bring inflation to heel means that there is ample room for the US dollar to extend its prevailing uptrend. After all, several officials have recently expressed the view that interest rates should be kept untouched for a while after they hit a ceiling. Therefore, even if next week’s gathering results in a setback in the US dollar, it may be just a temporary correction before the next leg north.

Equities in red on hike bets and global economic woes

Wall Street resumed its slide yesterday, with the Nasdaq losing the most ground once again, which is indicative of investors acting based on their Fed-hike expectations. After finding strong resistance at 4,160 and falling sharply due to the US CPIs on Tuesday, the S&P 500 managed to break back below the key support zone of 3910, which adds to the notion of further declines in equities.

What may have been an extra reason for investors to reduce even more their risk exposure is the World Bank’s assessment that the globe may be on the verge of recession as central banks are simultaneously stepping hard on the brakes of their economies. Yet, overnight, Chinese data showed that industrial production, fixed asset investment and retail sales, all for August, fared better than anticipated, but still, property related metrics worsened, highlighting the deep wounds of the sector, and adding to concerns with regards to the future of the world’s second largest economy. That view is amplified by the fact that China’s Shanghai Composite fell 2.30% during the Asian session today.

As if all this is not enough, FedEx tumbled 16% post-market yesterday after the firm withdrew its projections, saying that its business would likely shrink even more. This points to a lower open today, and perhaps another red day for Wall Street.

Oil slides as rail strike temporarily averted

Oil prices were also down yesterday, with WTI tumbling around 4% as major US railroads and unions reached common ground and secured a temporary deal after 20 hours of continuous and intense negotiations aimed at averting a strike and a rail shutdown that could weigh on food and fuel supplies.

With the World Bank warning over a global recession, China still bleeding, and the dollar flexing its muscles due to the prospect of an even more forceful Fed, the path of least resistance for the ‘black gold’ probably remains to the downside. Yesterday’s slide may have added to the chances of WTI overcoming the $81 barrier soon, a move that would confirm a lower low and thereby the continuation of the prevailing medium-term downtrend.

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