Dangerous game: Wall Street’s wild ride sends a message to investors

Fed Chair Jerome “Powell has been clear that the Fed does not intend to pivot until the path to lower inflation in clear,” said Ed Clissold, the chief US strategist at Ned Davis, who is neutral on US shares, favouring small-cap companies over large. “The market should remain volatile in reaction to economic data points and Fed Speak.”

Meanwhile market-implied inflation expectations over the next two years have tumbled from as high as 4.9 per cent in March to around 2.3 per cent, implying traders reckon price pressures will fall closer to the Fed’s target – clearing the path for a dovish policy pivot, in theory.

“Things need to get worse before they get better or before we see a Fed pivot.”

Christopher Harvey, head of equity strategy at Wells Fargo.

Yet those expectations are too benign, says Goldman’s Mueller-Glissmann. And it wouldn’t be the first time hopes for peak inflation have been disappointed. The US consumer price index climbed by a more than forecast 8.3 per cent in August from a year earlier, wrong-footing many in the market. The Fed’s preferred inflation metric, core PCE data, also exceeded predictions last week.

Friday’s jobs data and the latest consumer price report due next week will give fresh clues on how much room the Fed has to tighten the monetary screw without materially damaging the US business cycle.

Risk bulls may have seized on a seemingly newfound acknowledgment from US monetary officials that the global economic landscape is darkening and that the Fed is attuned to the negative spillovers. Yet any resulting damage to the US economy would be the proximate cause for a tentative shift in its rate-hiking campaign – a scenario that some market watchers say is bad for all types of investors.

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“Things need to get worse before they get better or before we see a Fed pivot,” said Christopher Harvey, head of equity strategy at Wells Fargo.

Bloomberg

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