Yesterday, Nancy Pelosi landed in Taiwan and did not spark a new conflict as many have speculated (at least for now). Today, data on business sentiment in the US services sector showed that economic activity is doing great. The Fed cannot feel satisfied. He has been saying for a long time that he sees no problem that the United States may enter a recession. On the other hand, maybe the Fed was right that the United States was not and will not be in any recession. However, are we not going to see a repeat of the 1970s? Or maybe these data will provide a stronger basis for further aggressive hikes?
The S&P 500 returns to growth. Declines on the WIG 20
Fortunately, yesterday’s visit to Taiwan by Nancy Pelosi did not trigger WW3 as some have suggested. This is an important geopolitical event, but it does not appear to have led one or the other to major decisions. Of course, China has announced military exercises around Taiwan, but it is known that launching the attack would mean the total isolation of China from the US and other NATO countries. This, of course, does not pay off for China in any way. In turn, today we observe a very interesting discrepancy in the survey data in the US. The ISM index for the services sector shows an increase to 56.7 points, mainly due to new orders, with a simultaneous decline in prices paid. On the other hand, the PMI index by S&P Global showed a slight rebound from the preliminary reading, but only to the level of 47.3 points. Almost 10 point difference may make investors wonder – are we in recession or not? Theoretically, the ISM is more reliable, which is related to the long history of this indicator. On the other hand, the PMI index indicated a clear economic downturn at the beginning of 2020, or also in the last quarter of 2021. The ISM has recently adjusted to the PMI index. It is worth mentioning that the service sector, just like the labor market, shows problems in the economy only with a delay. On the other hand, the Fed may take this as evidence that there is no recession in the economy at all and it gives a mandate to further stronger rate hikes. At the moment, expectations for a rate hike by 75 basis points in September are strongly growing. Moreover, we are in favor of a series of hawkish statements from the Fed. Bullard says he does not rule out hitting the 3.75-4.00% range in the US this year. Until recently, the market valued only 3.25%. What does this mean for the stock market? No recession and lower oil prices are positive for the stock market. However, if the yields start the rally again and we return clearly above 3%, a return to the downward trend cannot be ruled out, or at least testing the last local lows. If the Fed actually wants to trigger a recession in the US to contain inflation, like it did in the 1970s, it won’t be good news for the stock market. The moods aren’t the worst. Just before the close, the DAX gains 0.88%, but there is no shortage of increases in Europe exceeding 1%. However, the WIG20 lost 1.5%, dragged down by the banking sector. On Wall Street after 5 p.m. we can see clear increases: the S&P 500 is gaining 1.1%, while the Nasdaq is growing by as much as 1.9%.