Light in your head and dead on your feet, another crazy day
US stocks had a decent bounce on Friday after a torrid week for stockholders, or more precisely, about 4 weeks. The fall in US stocks coincided with February’s weaker-than-expected Purchasing Managers Survey. In contrast, Gold topped 3000 dollars this week, a further sign of risk aversion, one could argue. The question that all fund managers will be asking themselves is, do I buy the dip or sell the rally? That’s the question.
On Friday, the latest Michigan Consumer survey reinforced the view that the US consumer feels less confident. The University of Michigan’s consumer sentiment index fell to a preliminary reading of 57.9 in March, the third consecutive monthly drop and the lowest reading since November 2022. The same survey revealed that inflation expectations one year ahead jumped to 4.9 per cent, their highest level since November 2022. By the end of the week, the 2-year US treasury yield had popped back over 4%, a possible indication that the market was feeling slightly less confident when the first rate cut was coming.
The week starts with the monthly US retail sales data; economists are forecasting a significant month-over-month drop. Then, on Tuesday, we get the same for the changes in import and export prices, alongside the latest industrial and manufacturing production data. Wednesday is the main event as the FOMC meets to decide what they will do with interest rates. The most likely outcome is nothing. The bigger question will be their commentary around the health of the US economy and any hints they may give about their expectations for when the first cut may occur. If Jerome Powell indicated the members were more open to a rate cut, say at the next meeting, would that reinforce the market’s concerns about the underlying state of the economy? A more dovish tone could quite possibly impact investor sentiment further. Then, we get more employment data on Friday with the monthly jobless claims.
We all saw the pretty poor GDP data from our economy on Friday. This week, the Bank of England will also meet to decide what to do with the UK interest rate policy. Again, expectations are for no change, despite this latest lacklustre economic report. The voting committee will get to the monthly jobs report and average earnings, which will be released ahead of the meeting. It may be noteworthy that the 2-year gilt yield has hardly moved in the past month and actually rose modestly on Friday after that weak economic report. If rates are as expected and left unchanged, I guess the focus will turn to how close the vote was for some indication of where sentiment is trending amongst the members. The main event in Europe will be the latest Euro area inflation data. Year-over-year inflation is expected to remain around 2.5%.
Buy the dip or sell the rally—that was the question I posed initially. History tells you that selectively buying the dips for long-term investors is generally a good policy after a correction of this nature. In the short term, can I see a realistic change in sentiment? Not necessarily. Wednesday will be interesting.