This is going to be a critical week in the financial markets. The publication of inflation on Tuesday in the US will provide a high estimate regarding the interest rate decision – a miss, i.e. high inflation, can lower the markets due to the expectation of a high interest rate increase – 0.75%, while low inflation may lead to an interest rate increase of 0.5%. So it is true that one should not be impressed by a month One, but the markets are very volatile and any pip in inflation can affect them dramatically.
Beyond that, the rise in interest rates is a great danger to the markets because it makes solid investments more attractive. Why invest in Apple at a multiple of 25, which expresses a return of 4% per year when on two-year bonds you get 3.5% and it is going to rise?
In the past week, the Dow Jones index rose 2.6%, the S&P500 index rose 3.6%, when it is again above the key level of 4,000 points, and the Nasdaq jumped 4% – the indices broke a streak of 3 red weeks.
Despite the increases in the indexes, so is the yield on the 10-year bond Increased by 0.1% from 3.2% to 3.3% yield. The two-year yield set a new record – 3.5%. Oil continued its downward trend last week when it fell by 1% to a price of $86. As a result, the price per gallon in the US has already dropped to $3.8, far from the $5 it peaked at. The figure will of course affect the energy prices that turn into inflation in August, which will be published next Tuesday.
In the macro sector – the eyes of investors from around the world and of course the chairman of the Federal Reserve, Jerome Powell, are focused on Tuesday, at 3:30 p.m., when The consumer price index for the month of August will be published. Economists’ forecasts indicate a 0.1% drop in inflation in August, and an annual rate of 8.1%. Core inflation on a monthly basis is expected to increase by 0.3% and on an annual basis by 6.1%. If there is a continuation of disinflation (decrease in the end of inflation) the market will welcome it, and certainly Powell too, who will probably moderate the hawkish tone. If this time we see inflation above forecasts again, we may see the fluctuations in the markets again.
A day later, on Wednesday, the producer price index will be published, which is also very important, because the producer’s costs are often passed on to the consumer. On Thursday we will get an indication of the retail situation in the US last August with the retail sales figure. In addition, on the same day at 18:30 the Consumer Price Index in Israel will be published. A day later, on Friday, the consumer price index of the European bloc.
At Bank Leumi, Dr. Gil Michael Bafman, Leumi’s chief economist, and Dodi Reznik, an interest rate strategist, referred to the “method” used by the world’s central banks, such as the ECB last week: “The central bankers have to choose between the “cautionary path” and” The path of determination.” It seems that the emphasis today is on the path of determination that leads to the tightening of policy and to a considerable degree of aggressiveness. The central bankers are afraid of the danger of high inflation becoming established and in deciding policy measures they are more afraid of a situation of “doing too little” than “doing too much”.
In reference to the inflation figure on Tuesday: “The trend of central banks, as reflected this week in the interest rate decision in the Eurozone, is expected to continue both in the US and in Israel. It seems that only a particularly low core index on this coming Tuesday may possibly lead to an interest rate increase of less than 75 basis points. The probability of such a surprise is very low and there is a high probability of an increase in interest rates in the US to the extent of 75 basis points later this month. This assessment is also supported by the continued statements of the heads of the Fed regarding the need to continue with the monetary tightening.
In Leader Capital Markets, they referred to the published ISM index, which indicates that the USA is not really close to a recession: “USA: The recession is still far away – one of the most important data that reflects the current activity in the USA, is the ISM purchasing managers’ index in the industries The services, the survey regarding the month of August is certainly current and significant. As we know, a figure above 50 points indicates expansion.
The index rose to 56.9 points in August from 56.7 in July, while the expectation was for a decrease to 55.
At the best brokerage, along with Alex Zbzinski, they also believe that even a slowing inflation will not stop the interest rate hikes by the Federal Reserve: “Inflation is on its way to moderate, but the Fed will continue to be aggressive, claims for unemployment benefits continue to decrease and indicate that the labor market is still strong.” We note that all Fed speakers, including the governor, who spoke last week pointed to the labor market as the main reason for an aggressive increase in interest rates.
In addition, the best also addressed the bond markets and yields, which in a period like this, are like a compass for the markets: “Bond yields continued to rise last week in response to the actions and statements of the central banks: in the US for the first time, the contracts imply that the Fed interest rate will reach 4% at the beginning of 2023.
Expectations for a rise in interest rates led to a continued rise in yields while the yield curve inverted, with the two-year yield reaching 3.55%, the highest level since 2007. The relationship between the two-year yield and the FED interest rate since the 1980s shows that during rising interest rates, they always peaked at the maximum level of the interest rate or above it. Therefore, an increase in the forecast for interest to 4% reflects that the increase in yields has not yet been exhausted.’