The wrath of the Fed’s “higher for longer” persists.

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The equity market struggled to bounce from its consecutive days of losses only to close higher during the final ten minutes of the regular trading session. This week, investors will seek clues on the US economic health that could affect the Fed’s path forward on interest rates.

Key Highlights for the Week

In particular, we will examine two economic reports. First on the line is the second quarter GDP. A continued robust economy helps boost the odds of a soft landing but complicates the narrative of the waning inflation. After all, a strong economy may not help tame inflation, sending the interest rate to remain elevated.

Next, we will usher in the PCE price index for August. It excludes volatile components such as food and energy and is the Fed’s favourite inflating gauge. The expectation is that it climbs 3.9% on an annual basis.

S&P 500 In Focus

As discussed earlier, the index has strong support at the 4300 level. Missing that, we will see a possible fall to 4200 and then an ultra support level at 4075. We maintain that view on a bearish short-term outlook.

Adding pressure to major indices is the rise in Treasury Yield, hammering stocks down. Across the board, yields have risen more decisively after Uncle Powell tilted towards keeping interest rates higher for an extended period to ensure inflation is under control.

The expectation is now for the economy to weaken further from here, and thus, the prospect of a soft landing, which Uncle Powell had sent a hawkish statement, is not a base case that the Fed is exploring. The takeaway is that the Fed will do whatever it takes to bring inflation back to its long-term average of 2% target, even if it means wrecking the economy into a recession.

That jitters investors and traders and sends indices on a downward spiral.

China is less likely to lift the global economy.

While previous episodes of the crisis saw China rising up to the challenge of lifting the global economy, it is unlikely to repeat the same story. The economy is burdened by burgeoning corporate debt, largely in dollar terms, and sluggish domestic consumption dragged by the property market downturn.

High youth unemployment will cap the growth of consumer spending. With a weak bond market, the dependence on local funding and less willingness of local banks to spur large-scale lending means a modest recovery, if any, can be seen.

Moreover, we are seeing concern about the outflow of investment out of China, which is exacerbated by the prospect of a weakened Yuan, thus prompting the Chinese government to set a realistic yuan daily fixing rate to ensure investors of its committeemen maintain a steady foreign exchange strategy.

It’s a tough nut to crack.

What’s on the menu today?

10pm : CB Consumer Confidence (Sept), New Home Sales (Aug)

It is 26 September, Tuesday, 8.55 am in Singapore and 8.55 pm in New York. The equity markets remain weak, and any short-term bounce might be short-lived unless we see convincing evidence of falling inflation data on Friday.