Investors hold their nerve before a potential maelstrom

• The S&P 500 is down a modest 1.4% this week after shedding 4% from Thursday last week.
• The markets are presently hyper-focused on inflation and reactive policy.
• What to expect from the balance of the week with a slew of sensitive international economic data being published.

Investors hold their nerve before a potential maelstrom

The markets are off to a slow start this week. The S&P 500 is down 1.4% after shedding 4% at the tail end of last week.

The S&P ASX/200 is flat from Monday’s open after pricing in the sell-off in US markets from Friday.

With few economic data points to work off on Monday and Tuesday, international markets have entered a period of consolidation, holding for the next price-direction juncture.

The rest of the week provides a window to the near-term stock market outlook with the ECB President Lagarde’s scheduled speech, US Federal Open Market Committee (FOMC) minutes, the US and Chinese inflation data, and US retail data.

In particular, we can expect the markets to overreact relative to the past on any surprise in the inflation data. The Fed has made it abundantly clear that inflation is its primary concern, and sustained elevation in prices will be met with a continuation of the aggressive interest rate hike schedule.

Toolkit responses

FOMC minutes on Wednesday will provide a window into the current thinking of the world’s most influential monetary policy committee. Inflation is currently stubbornly high, and interest rate hikes are the standard toolkit response.

The US Department of Energy (DOE) recently added petroleum reserve releases to the inflation-busting arsenal – an 8% oil price last week pre-empted the scheduled end to the DOE sales.

A stall in the oil price this week on the back of the COVID resurgence may also be partially attributed to the possibility that the DOE extends the programme. That would be most welcome to Australia, the UK and Europe, currently feeling the heat of high prices.

More of the same

China has maintained its tight restrictions on the freedom of movement, ostensibly on the precursor of COVID restrictions but with the added benefit of throttling inflation.

With the Consumer Price Index (CPI) rising 2.5% in August and an anticipated 2.8% in September, Chinese authorities will keep an extremely close eye on inflation within its borders.

A recent sell-off in the price of Iron Ore to below 100 USD/mt and oil below 100 USD/bbl will go some way to easing policymaker concerns. Elevated Soybean and Pork futures are undoing a lot of the good work on the international resource production and supply chain.

Until China’s economy can be unleashed entirely from the concerns over inflation and COVID, Australian resource providers, in companies such as BHP Billiton ASX:BHP (BHP) and Fortescue Metals Group ASX:FMG (FMG), will be price-capped in the stock market.

Expectations and outlook

The current consensus is for another month of general rises in the inflation data.

Without evidence to the contrary, we can expect continued hawkish language from international monetary policymakers, heaping continued pressure on bond and equity markets.

Any surprise to the downside in inflation data this week, and we can expect a sharp uptick in the stock market.