An overload of crucial events has left global markets on edge, with investors still trying to digest policy decisions from the European and Japanese central banks, the latest GDP report from the United States, and a flurry of corporate earnings that warned of economic storm clouds. In euro land, the ECB rolled out another three-quarter point rate increase to stomp inflation, but the overarching message was one of caution. President Lagarde stressed that the economic data pulse has started to weaken and essentially opened the door for a slowdown in the pace of tightening moving forward.
Cautious ECB message
As has become customary, the real guidance came from media reports after the press conference citing "ECB sources". Those revealed that the decision to raise rates was not unanimous, with three officials dissenting in favor of a smaller move, and that there’s no plan to announce a balance sheet reduction this year.
Market participants interpreted the cautious stance as a signal the ECB might throw in the towel once the economy truly hits turbulence, which pushed the implied ‘peak’ in rates lower and derailed the recent recovery in the euro.
BoJ doesn’t rescue yen
In Japan, the central bank kept interest rates pinned on the floor, refusing to join the global tightening wave. While inflation forecasts were revised slightly higher, economic growth projections were recalibrated lower, dashing speculation that a policy shift is imminent. Overall, the takeaway was that the BoJ remains committed to its ultra-loose stance, including the ceiling on yields that has devastated the yen, and will only consider changes once there are signs of ‘organic’ inflationary pressures in wages. Since wage growth remains muted, policymakers are not about to blink.
This leaves the yen at the mercy of foreign central banks, with the next move in dollar/yen likely to be driven by the Fed meeting next week. It’s difficult to envision a trend reversal as long as interest rate gravity is working against the yen, and unilateral FX interventions to shore up the currency might only slow down the pace of depreciation.
Amazon haunts Wall Street
A seemingly strong GDP print from the United States put the wind back in the dollar’s sails yesterday, alongside the ECB-fueled retreat in the euro. The US economy grew by 2.6% in annualized terms in the third quarter, dispelling some concerns about an imminent recession. Digging through the report, the good news was that price pressures seem to be cooling with the GDP deflator losing steam. However, most of the economic expansion was artificial as it reflected a collapse in imports, which shows up as growth in the GDP formula. The consumer's reluctance to buy imports despite the dollar’s incredible strength is quite worrisome.
Disappointing earnings from Amazon cemented this narrative. The company’s shares lost 14% in extended trading after it issued gloomy forecasts and warned that consumer spending is losing momentum. It’s been a dreadful week for the entire tech complex, with Amazon shares joining the ranks of Microsoft, Google, and Meta in losing ground.
Apple is essentially the last general standing after its own results beat Wall Street expectations, although management refused to provide any concrete guidance and cautioned that the macro outlook is turning darker. The earnings show will continue today with energy giants Exxon Mobil and Chevron. All told, it’s still too early to be bullish. Earnings estimates for next year have not come down enough to reflect what business surveys and company executives are warning, and valuations haven't fully adjusted to the higher interest rate regime. Hopes of a Fed pivot are holding this market together, and the challenge for Powell next week will be how to open the door for a smaller rate hike in December without giving the impression the FOMC is getting cold feet.
