Market Sentiment Driven by US-China Trade Relations and Jobless Claims

13 Sep, 2023

Market Sentiment Driven by US-China Trade Relations and Jobless Claims

In the time since my previous column, we've witnessed the emergence of new themes in the financial markets, alongside the strengthening influence of existing ones.

Global risk sentiment experienced a notable shake-up last week, triggered by concerns of a potential US-China trade war escalation. These fears intensified after Beijing instructed its government officials to stop using iPhones. Given that China accounts for roughly 20 percent of Apple's revenue, this development significantly impacted the tech giant's market capitalization, leading to a more than 3.5 percent drop in its stock price. Consequently, Apple's losses for the month of September exceeded 5 percent. Analysts interpret this move as a response to US-imposed restrictions on chip exports to China, introduced earlier in the year. Investors would be wise to closely monitor this unfolding situation.

The decline in Apple's stock price had a ripple effect on broader US indexes. The S&P 500, in which Apple holds a more than 7 percent weighting, closed below the psychological milestone of 4,500, registering a 1.29 percent decline for the week.

Adding to the pressure on US equity markets is stronger-than-expected economic data. Revisiting an ongoing theme – the actions of the US Federal Reserve – a series of robust data releases has shifted expectations regarding a potential interest rate hike at the Fed's upcoming meeting in late October.

The ISM data, measuring the performance of the US services sector, showed expansion for the eighth consecutive month. Simultaneously, initial jobless claims, a weekly metric indicating unemployment figures, reached their lowest point in six months, marking the fourth consecutive week of declining jobless claims. A decrease in initial jobless claims implies that the US labor market remains robust and tight, which poses a challenge for the Fed and sparks discussions about further rate hikes in the remainder of the year.

Currently, market expectations are pricing in a high likelihood (93 percent probability) of no rate hike at the next Federal Open Market Committee meeting on September 19 and 20, according to the CME Group's FedWatch Tool. However, the probabilities become more intriguing when considering the Fed's meeting on October 31 and November 1.

As of the time of writing, market sentiment is divided, with a 55.3 percent chance of the Fed keeping rates unchanged (versus a 41.9 percent probability of a rate increase). One month earlier, this division was 63.1 percent versus 33.9 percent. This narrowing ratio introduces further uncertainty into the markets, and once again, US economic data will play a pivotal role. This begins with the release of the US consumer price index report, scheduled for 4:30 pm Dubai time on Wednesday.

Market expectations anticipate a year-on-year inflation jump to 3.6 percent, up from 3.2 percent last month. However, this figure includes energy prices, which the Fed tends to overlook when analyzing inflation trends. Therefore, the core CPI print, which excludes food and energy, becomes more crucial. It is expected to decrease to 4.3 percent year on year, compared to the previous month's reading of 4.7 percent. A core print below the 4.3 percent threshold is likely to stimulate risk-on sentiment, driving asset classes higher against the US dollar and vice versa.

I anticipate that the CPI print will align with expectations, resulting in markets continuing to trade within their current range. We may not come any closer to predicting Fed actions at its penultimate meeting. In the current landscape, US jobless claims have assumed greater significance and are expected to influence short-term pricing action throughout the week. Therefore, it's essential to keep a close eye on whether we observe a fifth consecutive week of declining jobless claims, a scenario that could erode risk sentiment across the US equity market segment. Additionally, producer price data and US retail sales figures will follow on Thursday before attention turns to this month's FOMC meeting.