- The S&P ASX 200 & the S&P 500 are up circa 10% from September.
- Unemployment in the US and Australia is hovering around 3.5%
- Market watchers and policymakers anticipate that business hiring decisions will reflect the raised cost of living, yet a regular paycheck for many is making them wait.
Are we turning the inflation corner?
Thursday brought welcome news on a slight retracement of headline inflation, predominately derived from a slowdown in the a priori runaway housing rental costs in the US.
The slight moderation caught many short sellers off guard, and a swift unwind in positions powered the US benchmark indices sharply higher. Asia and Australia followed suit following persistent rumours of a relaxation in the Chinese COVID policies.
The cryptocurrency world has been thrown into disarray following the filing of Chapter 11 for the US arms of FTX and the withdrawal halts for international entities.
The spillover of the FTX failure is only beginning. Unfortunately, it will result in the loss of many thousands of well-paying jobs in the cryptocurrency and blockchain sectors.
FTX, through its venture arm, played a significant role in the explosion of this new sector. The once seemingly unlimited bankroll has halted almost overnight, with VCs re-evaluating new investments until the rolling tide of contagion washes out.
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The large majority of DeFi and blockchain-centred firms that don’t yet have a sustainable revenue runway will need to close shop before hitting their funding cliff.
For the broader global economy, the immediate impact will be felt more in investor sentiment and confidence as opposed to dollar terms, given that the sector’s contribution to GDP is still dwarfed by government spending.
The top 10 cryptocurrency firms’ direct employees number in the tens of thousands; by contrast, the number of direct and indirect employees of the ten largest firms number in the millions.
While cryptocurrencies enter a prolonged winter upon stifled investment with a massive freeze in hiring, the real economy enters its busy period for seasonal hiring and eCommerce.
The initial jobless claims from the US were a modest 225k, slightly higher than the consensus of 220k. Unemployment ticked marginally higher to 3.7% in the US and 3.5% in Australia. The record-low unemployment baseline will prevent a massive decline in immediate credit quality, though it will keep up the pressure on inflation.
Central banker battle
While general employment levels have remained high, the stock market has remained resilient, even under the pressure of record inflation.
However, there is a concern that inflation will be extremely difficult to return to target levels of 2% without massive increases in productivity under the blue sky of low unemployment demand.
For now, the market is taking a “cross that bridge when we get there” approach. It is rallying on news of slowing inflation, despite the derivative effect of the drawn-out inflation under only a moderate economic slowdown.
An anticipated surge in Chinese demand following the lockdown release may apply more pressure on inflation targets.
The market may have gotten ahead of itself with a single data point, and there is the ever-present possibility that we go higher rather than continue the descent – a negative outcome for stocks.