Global stock markets fell further on Friday as investors became more concerned that the Fed may not be able to rein in inflation for years to come, even as US data showed wage growth slowing in April.
US labor market data showed the jobless rate rising to 3.6% from 3.5% a month earlier as job growth moderated. Average hourly earnings grew 5.5% from a year earlier, down from the previous month's increase.
Even though data on employment and salary growth slowed down in recent months, the market seems to have leaned toward an inflationary environment that the Fed will not be able to face with the rate hikes they gave disclosed at their last meeting.
And because of this market sentiment, Fed funds futures are already pricing in about a 75% chance of a 75-basis point rate hike at next month's policy meeting. However, Jerome Powell said that the US central bank was not considering such a move.
Therefore, the market strongly disagrees with the statements made at the last Fed meeting and distrusts the effectiveness of its monetary policy in dealing with the rising inflation. Pessimistic opinions abound among market professionals. Some of them do not rule out a scenario of economic recession because of the inaction of the Federal Reserve, which will finally be forced to increase rates more abruptly.
But on the other hand, the earnings published by the major North American companies have beaten the forecasts by more than 80%. Even though an economic slowdown is happening due to the lockdowns in China and the war in Ukraine, the economy's leading indicators remain in the growth zone.
From now on, the key data for the market will be those related to inflation. This week the US CPI is published. Any sign of a decline or stagnation in these economic figures could be enough to turn market sentiment negative or at least stop the massive downward pressure we have seen over the last five weeks. Treasury bond yields will give us a clue in this regard. Any decline would be seen as positive for the market.
From a technical analysis standpoint, Wall Street indices are in a borderline zone. The DowJones 30 closed near a major support zone at 32,700, the threshold from which the index would enter a larger downtrend.
Sources: Bloomberg.com, reuters.com
