GDP was not that worse; initial jobless claims fell again
While investors are mostly waiting for any news and comments from Jackson Hole Symposium, today's US data was published much better than expected.
The latest GDP update by the US Bureau of Economic Analysis showed that the economy in the second quarter shrank less than initially reported by only -0,6%, while investors were waiting to see -0.8%. The positive data and sentiment saw in the labor market data as well. As the US labor department reported, Initial jobless claims for benefits fell to 243K for the week ended August 19 to decrease for the fourth week in the last five and cause another decline in the four-week average to 247.00K. Continuing claims also eased to 1,415K, down from 1,434K the week earlier. These numbers, besides positive sentiment, can have negative signs, telling that the worsening economic condition makes fewer people leave their jobs.
While in the last days, FOMC members repeatedly were talking about higher inflation and the need to control it, today earlier, Atlanta Federal Reserve President Raphael Bostic joined Nile Kashkari in saying that it may be necessary to raise the Fed Funds target range by another 75 basis points in September as economic data stay strong.
With such good news from the strength of the US economy, the chances of another 75 basis-point increase in the US rose to 60%, up from 50% earlier this week. While data confirm that the US economy is strong enough to bear the pressure of higher interest rates, inflation at 8.5% is more likely now to see a higher rate raise. However, the fear of recession with fast rate hikes can change the FED policy. Let us wait to have more signs and comments from Jackson Hole.
At the same time, the two-year yield, which rises in line with traders' expectations of higher Fed fund rates, touched 3.386% compared with a Wednesday close of 3.386% to increase the spread with 10-year bonds yields last seen at 3.11%. The sharp difference between 2-year and 10-year bond yields can be another confirmation of the greater possibility of economic recession.
ECB published its Account of the July Monetary Policy Meeting on the other side of Atlantic Ocen in Europe. Last month ECB increased the prime interest rates by 50 basis points to zero and surprised investors. The report published on Thursday shows that "Inflationary pressures were judged to have intensified," which means that in the next meeting also, we can see another rate hike, even with 50 bps, especially with the worsening inflation outlook by the ECB Governing Council.
Market participants are now pricing in a 100 bps rate hike by the ECB by October before gradually slowing the pace of tightening until 2023. They expect the ECB's benchmark interest rate to hit 2 percent by September next year.
I should remember again that the Russian-Ukrainian conflict, the energy crisis, the prospect of a recession, and the Fed's hawkish policy with high probability may lead to continued pressure on the stock markets. For now, Fed Chairman Jerome Powell is expected to reiterate his determination to fight inflation. If the chairman's remarks send a clear hawkish signal, the dollar index can even break the 110 mark for the first time since June 2002. On the other hand, less than expected hawkish tone can encourage the stock markets and vice versa.
