Fed Minutes spook Nasdaq, points to higher interest rates

By :  ,  Financial Writer

Nasdaq again led markets lower. Commodity markets notably oil were markedly weaker. The Fed’s Minutes of its July meeting spooked traders, emphasizing that rates might go higher to tame inflation. The dollar index is trading near 103.2, placing it just below the pivotal 200-day moving average near 103.3, perhaps poised to go higher on a technical view.

Bottom-line: risk-off.


Fed Minutes point to possible need for higher interest rates

Federal officials said more rate hikes could be needed to tame inflation according to meeting minutes just release. The CME’s Fedwatch tool still places a 90% probability on no more rate hikes at the next September meeting, perhaps too optimistic. Discussions showed most members worry about inflation, and could require additional tightening action from the rate-setting Federal Open Market Committee. In summary: “With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy”.

Further, the minutes noted that the economy was expected to slow and unemployment rise – but recent economic data is mixed on both points.  GDP gains have averaged above 2% in the first half of 2023, with 5.8% projected for the third quarter. Employment growth is robust, despite some signs of slowing, with an unemployment rate at 3.5% in July at its lowest level since the late 1960s.

US housing starts struggle with higher rates

  • The housing sector continues to struggle under the current high-interest rate environment, particularly with 10-year Treasuries trending higher – few buyers want to move and pay higher mortgage rates
  • US housing starts for July rose to an annualized rate of 1.452 million units, matching expectations of 1.455 million
  • June data was revised lower to 1.398 million, down from the original 1.434 million
  • New permits for housing starts were 1.442 million annualized in July, unchanged on the month, and slightly below expectations
  • House builder confidence slipped to 50 points, falling six points compared to July, and after seven months of increases, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

US oil inventories fall modestly

  • US commercial crude oil inventories (excluding the Strategic Petroleum Reserve) fell by 6.0 million to 439.7 million barrels in the week ending August 11, putting stocks roughly 1% below the five-year average for the week
  • Gasoline stocks dropped by 0.3 million barrels, 6% below seasonal levels
  • Distillate stocks rose by 0.3 million barrels, still 16% below levels typically seen at this time of year

Off Target, a straw in the wind?

  • Target cut its full-year profit outlook in today’s Q2 earnings report, warning that a weaker economy, rising interest rates, and uncertainty from the restart of student loan repayments in a few weeks will hurt its business

Another property firm defaults in China

This is becoming a worrying trend, creating more fault lines for China’s economy. Sino-Ocean Group reportedly defaulted on interest payments on bonds following an anticipated loss of as much as $2.7 billion in the first half of this year. This follows reports of defaults by property giant Country Garden last week. The property sector accounts for a fifth of China’s gross domestic product, amplifying the impact it has on consumer sentiment. It seems that each day brings more evidence of fractures in China’s economy. China’s new home prices in 70 major cities fell 0.1% year-on-year in July, after being flat in June. Property sales in China are down 6.5% year-on-year, with little sign of a recovery at this point.

Russia continues to press Ukraine exports

Russian drones attacked grain facilities at the Ukrainian river port of Reni on the Danube River overnight, raising concerns again of tightening supplies of food grains on the world market. Ukraine’s ports on the Danube accounted for a quarter of Ukraine’s grain exports prior to the end of the Black Sea Grain Initiative, but they have since become the primary option for exporting grain. Russia is essentially implementing a de facto blockade of Ukraine to prevent it from exporting food grains via water routes. The primary question for grain traders is, how will Ukraine respond to this latest attack on its ports? It has previously vowed to respond to each attack with a similar counterattack on Russia’s export capability, which it has already backed up with a previous attack on Russia’s port at Novo. What will be Ukraine’s response this time?


Equity markets sell off, led by Nasdaq

  • Equity markets sold off more sharply after the Fed minutes were published, with the Nasdaq and Russell 2000 off 1.0%, while the S&P 500 was off 0.6%
  • Global markets were generally weaker, with the Nikkei 225 down  1.5%, the FTSE100 off by 0.4%, while the DAX was up 0.1%
  • The VIX, Wall Street’s fear index, rose to 16.8

Dollar stronger, bonds weaker

  • The dollar index was up by 0.3% against a basket of currencies to 103.4, a small move but one which argues for a technical break to the upside
  • The dollar was 0.5% stronger against the Yen, by 0.5%, flat against Sterling and 0.3% weaker against the Euro
  • Bonds were weaker, with 2-year and 10-year Treasuries yields at 4.96% and 4.26%

Commodities weak across the board, led by oil

  • Crude oil prices saw continued profit-taking, falling 2.2% to $79.2 per barrel
  • Gold and Silver prices both fell by 0.6% and 0.8%, respectively, to $1,924 per ounce and $22.5 per ounce
  • Grain and oilseed markets are notably higher on resumed tensions in the Black Sea and on a hotter drier Midwest forecast for the last half of August

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com


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