For now, the macroeconomics reflect a system that has managed to weather the Fed’s attacks for now.
We see an increase in long-term rates due to three recorded events:
- Oil escapes into zone “85”. (resulting in a jump of about 15 basis points in the 30-year breakeven level, bringing a new increase that increases inflation expectations in long-term interest rates).
- Out of the “Fitch” event (in the event of a credit rating downgrade) an unexpected systemic risk premium was added.
- Since the beginning of 2023, we have experienced an economy that is “disinflationary, without recession.” Although this can be explained by the fact that there would be large jumps in productivity, it also served to boost long-term real and nominal interest rates.
The truth is that from May to mid-July 2023, in my opinion, the productivity shock story was the dominant story. I believe that increasing systemic risk began to dominate and led to the correction that we are seeing in the stock market, particularly in technology stocks.
The question is whether it will be damaging enough to drown out the bull market. It remains to be seen which of the two effects will ultimately prevail: greater systemic risk or higher productivity.
The “Fitch event” created a jump in the long part of the curve and has led to a rise in long-term interest rates across the G10 and emerging market sovereign debt spectrum. Most likely, this effect will be a vertical effect, culminating in higher rates and overreaction. Regardless of this event, the fundamentals hold true and it will be these two trends that will ultimately determine the survival of the timid bull market.
This served to give the market an excuse to take profits, deflating the Nasdaq and creating reasonable entry points again. It seems that I cannot bow to this bull market, which continues to depend on the macroeconomics. In this scenario, the employment data for a robust North American economy remains unchanged. Everything is reassessed based on inflation data.
The year 2023 is data-driven and will be influenced by disinflation and/or recession. Employment data released in early August once again describes an economy showing signs of resilience.
For now, the macroeconomics reflect a system that has managed to survive the Fed’s attacks for now. In the event that the monthly CPI and PCE (inflation) data continue to describe current trends, the market will continue to be happy. For a market trying to process the “Fitch event,” the employment data means the first hurdle has been overcome. It will be the CPI and PCE data that will determine Wall Street’s momentum.
