The year so far has been a relatively good one for US equities, with the US big three indices of the Nasdaq 100 (+40.76%), S&P 500 (16.68%) and Dow Jones Industrial Average (+4.56%) all up significantly YTD. This comes after a fiendishly devastating 2022 that saw US tech stocks especially hard hit.
The good performance is almost illogical given the bleak situation around the world, with geopolitical instability, rising price pressure, and energy shortages abounding. Once again, the market reminds us just how unpredictable it can be. As always, however, macroeconomics will remain a leading factor in any analysis of the medium-to-long-term performance of key asset classes, including stocks and indices.
And as the world braced for the key release of the latest US inflation data — a metric that will undoubtedly help to guide Fed policy on interest rates — on 13 September 2023, investors and traders were looking for any hint as to where the market is headed in Q4 2023. Ahead of the release, stocks corrected slightly downwards while oil managed to cement its recent gains in response to the impending publication, but what does this mean is expected, and how will it affect equities and other key instruments?
Inflation not out of air yet
The latest Consumer Price Index report revealed that, far from melting away, inflation in August was reported at 4.3% year-over-year, with elevated energy prices threatening to keep headline inflation at 3.7% or above for the foreseeable future. This was slightly worse than the predicted level of 3.6%, but it's the increases in core expenses like petrol (+10.6%) and rent (+0.5%) that make the situation worse.
What's more, energy costs — and natural gas, in particular — are only going to increase further as the winter sets in. And this winter is tipped to be a cold one. If these numbers show anything, it's that we're unlikely to reach the Fed's target inflation rate by Christmas, at least not organically. That means that the US regulator could still be forced to intervene with additional rate hikes, which will push consumer finance rates higher and thus reduce ordinary people's spare income for investment.
This impact will be further exacerbated by the higher central heating and petrol prices, leaving very little left over at the end of the month. As we touched upon earlier, US stocks had already dipped overnight in the futures market, with the S&P 500 (.SPX) falling 0.6% and the Nasdaq losing 1%. This would suggest that the smart money was always banking on these CPI figures coming out worse than expected. However, this did not play out to significant declines during regular trading on Wednesday, which could be a positive sign for the longer term.
Oil is holding on to its recent gains and shaping up for further rises in Q4 2023 and Q1 2024. We've already seen pump prices increase nearly 10% this month, and with crude still rising, who knows where it will end. Industrial production is up in China and India, and to sustain this activity, fuel is required. In fact, China's state-owned energy giant Sinopec recently issued a tender for as many as 25 LNG cargoes between October 2023 and December 2024. Despite the green revolution, internal combustion engine vehicles are still by far the most numerous across Europe and the US, and many people drive more in winter to avoid the cold.
In light of this expected demand hike, the effects of the OPEC+ production cuts are going to be even more pronounced. We must remember that Saudi Arabia and Russia recently agreed to extend their respective 1 million and 300,000 bpd cuts to the end of 2023. With Brent already above $90 a barrel for the first time in almost a year, we could be headed for another energy crunch unless supply-side pressure eases.
Natural gas, on the other hand, is at a multi-year low and a veritable million miles away from the prices we saw in late 2022. Given the geopolitical instability in Europe and the colder-than-usual winter predicted ahead, demand is set to skyrocket in the winter. Without any stable gas supply through traditional routes, LNG is likely still to be a huge part of the Old Continent's energy mix, so the Henry Hub could be one to watch in the coming months.
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