09.08.2022 06:14 AM
Nonfarm, inflation, and business activity indices

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Since the Fed meeting is already behind us, we only have to actively analyze the macroeconomic statistics coming from overseas and the speeches of the members of the Fed monetary committee in the coming weeks. However, before doing this, we want to pay attention: two of the three US stock market indices (despite fairly strong growth in recent weeks) failed to overcome or update their previous local maximum on the daily timeframe. From our point of view, this is quite an important point that signals the corrective nature of the upward movement. But let's return to the "foundation" and "macroeconomics." We have already said yesterday and today that opinions within the Fed are divided into two camps. The former believe that a 0.5% rate hike will be enough in September, but at the same time, note that the upcoming inflation reports may influence their decision. The latter believe that it is not the time to soften the monetary approach, and it is necessary to raise the rate at the same pace until inflation shows a significant slowdown. From our point of view, the second is right, and they will win at the September meeting. Moreover, they have at their disposal one very important basis: a strong labor market and low unemployment.

As the latest NonFarm Payrolls report showed, jobs in the States continue to be created in enviable quantities, meaning there is no recession now, as Jerome Powell said. The fact is that the recession is accompanied by mass layoffs, rising unemployment, falling real household incomes, and other not very pleasant things. Now, almost all macroeconomic statistics from overseas are coming in very strong. Even the ISM index in the service sector unexpectedly increased, although the similar S&P index, on the contrary, fell below 50.0. But the ISM index is more important, so here the US dollar and the Fed won. We want to say that with such a strong labor market and low unemployment, the Fed has the opportunity to continue to actively tighten monetary policy without fear of a recession and criticism of provoking a recession from the public and Congress. That is, strong "macroeconomics" combined with high inflation, as it were, unties the hands of the regulator, allowing him to tighten monetary policy as he wishes, without regard to possible consequences for the economy. This is bad news for stock indices and stocks because the higher the rate rises, the less attractive they become to investors. Recall that the rate is growing for a reason, along with it the profitability of the safest assets is growing, the demand for which, naturally, begins to grow due to a drop in demand for risky assets. Therefore, we believe that bitcoin and US indices will continue their decline in 2022.

Paolo Greco,
Analytical expert of InstaForex
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