Nasdaq slide continues, Oil sees profit taking

Nasdaq continued to slide this morning, off 1.4%, with key index component Apple off 3.4%, mixing stock specific concerns and the impact of rising bond yields on highly rated stocks. Oil fell back on profit-taking after a recent run and reconsideration of the real impact of production cuts. The dollar index held on to key chart levels with signs of pushing higher.

Bottom-line: risk-off.

TODAY’S MAJOR NEWS

Apple hit by Chinese government ban

China has reportedly banned the use of iPhones for central government officials, hitting Apple and other tech stocks. Chinese officials have already been following an unwritten rule of ditching iPhones for some time, but now it’s official. China is a significant market and manufacturing center for the company, accounting for around a fifth of revenues. This is the latest action in a progressive round of tit-for-tat bans which have seen the US ban the supply of AI chips to China. Apple fell 3.4% in morning trade to $177, with weak support under $174 after a 40%-plus rise in the year-to-date. Nvidia fell 3.0% to $456, still up over three-fold for the year-to-date. After strong rallies, tech stocks are prone to negative reactions on any bad news.

Is the economy slowing enough to meet the Fed's inflation target?

The economy is slowing, but is it slowing enough to get inflation down to the Federal Reserve’s 2% mandate? That’s the question being considered by members of the Federal Open Market Committee ahead of their next meeting on September 19-20. Wednesday’s Beige Book indicated that current US economic growth is modest, with subdued job growth and slowing inflation. However, the economy is still perhaps too resilient to bring inflation down to the 2% mandate.

Fed doves are nervous, wanting a pause to see if the current rates are good enough, with a possible pivot soon. Fed hawks are worried about pivoting too soon, as the Fed did in March of 1980. Fed Chair Jerome Powell has made it clear on several occasions that he doesn’t want the board to pivot too soon under his watch. He would rather error on the “higher for longer” side of the fence than error on the side of pivoting too soon.

Powell has done a masterful job of keeping votes of the FOMC unanimous. His job will get more difficult going forward. Monthly job growth averaged 150,00 per month over the past three months, sharply down from previous months, but still 50% higher than the 100,00 new workers entering the job force per month with normal population growth. Headline inflation is at 3.3%, down from 7% last summer, but still well above the Fed’s 2% mandate.

The question is, has the Fed done enough to get inflation down to 2% amid the current stickiness of wage inflation, and at a time when the value of a basket of commodities is trending higher? No rate rises are forecast by traders according to the CME’s FedWatch tool.

Tight labor market, stubborn labor costs

• First-time claims for unemployment benefits fell 13,000 to 216,000 in the week ending September 2, rather rising
• The four-week moving average fell modestly to 229,250, down from 237,750 the previous week
• Continuing claims for the week ending August 26 fell 40,00 to 1.679 million, with the four-week moving average dropping slightly to 1.702 million
• These numbers continue to reflect a tight labor market that supports stronger wages, or in the Fed’s eyes, wage inflation that makes hitting its 2% inflation target difficult
• Unit labor costs rose at an annualized rate of 2.2% in the second quarter, up from the 1.6% gains originally reported for the quarter according to the Department of Labor – also an inflationary signal

TODAY’S MAJOR MARKETS

Nasdaq leads markets lower on tech sell-off

• Equity markets were weak in morning trade, led by a 1.1% fall in Nasdaq, 0.4% in the Russell 2000 and 0.4% in the S&P 500
• Global markets were mixed overnight, with profit-taking taking the Nikkei 225 down 0.8%, the Dax off 0.1% and the FTSE 100 up 0.2%
• The VIX, Wall Street’s fear index, edged higher to 14.8

Bond yields consolidate at higher levels

• 2-year and 10-year bonds fell back to 4.97% and 4.28% respectively, but appear to be consolidating at higher levels
• The dollar index rose 0.1% to 105.0
• Versus the dollar, the Yen rose 0.2%, the Euro fell 0.2%, while Sterling was unchanged

Oil sees profit-taking

• Crude oil prices saw profit-taking falling 0.9% to 6.8 per barrel. While headlines focus on the Saudi and Russian production cuts, global oil supply is actually pretty robust and might soon outrun output reductions
• Spot gold and silver prices were unchanged at $1,933 per ounce and $23.0 per ounce, respectively
• Grain and oilseed markets were mostly weaker, allowing the above outside market forces to consolidate prices lower following yesterday's gains.
• StoneX's customer survey revealed higher corn and soybean yields than expected, easing some market concerns

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

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