Hawkish Fed Continues to Weigh on Stocks

Weekly Wrap Content for the week of Sep 2:

1. Week 35 major indexes performance;

2. Week 35 US sector indexes performance;

3. Major indexes weekly charts of support and resistance levels;

U.S

For the week ended Sep 2, U.S stocks finished solidly lower heading into the Labour Day holiday weekend, erasing early gains that came in the wake of the August labour report, and notching a third week of losses. While the report showed job growth was slightly higher than expected and wage gains moderated, it didn't appear to cool off some of the elevated expectations about how aggressive the Fed will be later this month. The S&P 500 Index extended the daily losing streak that began with Fed Chair Jerome Powell’s August 26 speech at the central bank’s Jackson Hole conference, widely perceived as hawkish. Refer to major indexes’ weekly performance tables below.

Key highlights for the week and outlook:

1.    Monthly job gains still strong. Friday’s August jobs report showed that the economy added 315k jobs last month, a number seen as solid though down from a revised 526k in July. The unemployment rate rose to 3.7% from 3.5% in July as the labor force participation rate increased. 

2.    Rates hikes. Fed chairman Jerome Powell told investors at Jackson Hole that the Fed is committed to raising rates and fighting inflation until it "gets the job done." Markets now are still forecasting a 75 basis-point (0.75%) rate hike at the September FOMC meeting and a terminal fed funds rate of close to 4.0%, with expectations of Fed rate cuts removed from mid-2023 forecasts. 

3.    Bulls’ potential turnaround. Upcoming two key factors: midterm elections and a potential Fed pause in 2023. Midterm elections will be held on Tuesday, November 8th this year. Historically, the period after mid-term elections tends to be positive for markets, regardless of which party wins. Markets expectations for the Federal Reserve to raise rates to 4% by December 2022 and keep rates at elevated levels at least through 2023. 

4.    Economy still strong. The ISM manufacturing index, which tends to be a good proxy of economic activity in the U.S., came in at 52.8 for August, above expectations of 52.0. A reading above 50 indicates economic activity is generally expanding. The strength of the labor market and the resilience of the ISM manufacturing index point to a U.S. economy that remains healthy and has some cushion to absorb the ongoing interest rate increases.

SPX sectors in play

All 11 sectors in the S&P 500 fell this week. Value stocks continued to outperform high-valuation growth stocks, and large-caps held up significantly better than small-cap shares. Energy(XLE) shares suffered as oil prices declined below USD 90 per barrel for West Texas Intermediate(WTI) crude, the U.S. benchmark. The growth-oriented technology(XLK) stocks continue suffering from selling pressure in anticipation of upcoming rate hike this month. Refer to below sector indexes weekly performance table.

Technically all three major indexes pulled back for 3^rd week, technology dominant Nasdaq composite index led the losses with 4.2% down.

DJI weekly chart

SPX weekly chart

Nasdaq weekly chart

China/HK

China’s stock markets fell as coronavirus outbreaks in major cities triggered renewed lockdowns and dampened the economic outlook.  The broad, capitalization-weighted Shanghai Composite Index(SSE weekly Chart) retreated 1.54% and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, slipped 2.04%.

In the southern tech hub of Shenzhen, most of the city’s nearly 18 million residents were under virus-related controls amid the most serious outbreak since the spring. In southwestern China, Chengdu, the capital of Sichuan province, went into lockdown Thursday with mass testing planned through the weekend. The southern port city of Guangzhou also imposed restrictions. As estimated by research firm Capital Economics, 41 Chinese cities, responsible for 32% of the country’s gross domestic product, are grappling with coronavirus outbreaks, the highest number since April.

China said it would implement a landmark audit agreement it struck with the U.S. last month. Both countries signed a preliminary deal on August 26 that would allow U.S. accounting officials to review the audit papers of U.S.-listed Chinese companies, resolving a yearslong dispute that threatened to kick off about 200 Chinese companies from U.S. exchanges.

The official manufacturing Purchasing Managers’ Index (PMI) rose to 49.4 in August from July’s 49.0, above expectations but still below the 50-point mark that separates contraction from growth. Meanwhile, the private Caixin manufacturing PMI declined to 49.5 in August from 50.4 in July, reflecting the impact of nationwide power shortages and virus lockdowns. China has room to adjust monetary policy as stimulus measures to support the economy have been restrained and consumer inflation is under control, a People’s Bank of China spokeswoman said.

Hang Seng index (.HSI weekly chart) fell 2.65% this week. Technically, the index has been trapped in a five-week sideway consolidation range near recent bottom.  

Singapore

STI index (STI weekly chart) fell 43.84pts or 1.3% to 3205.69 this week. Technically, the index closed at its lowest in five weeks, it’s currently still trading in a short-term downtrend started four weeks ago. Immediate downside support at 3190- around its 50dma level. The trio local banks appear resilient and holding up well, STI index grinding lower but seems selling is still under control.

Source: Contents/Data including information from various public market reports