Markets fight the Fed | CNN Business

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Stocks enjoyed a strong summer rally, easing investor fear and bolstering hopes that the bear market is settling into an early hibernation. But at any moment, strategists warn, the Federal Reserve could deliver a reality check that rattles complacent traders.

“Markets have [gotten] used to the idea of ​​the Fed stepping in to the rescue,” Michael Hewson of CMC Markets told me. “I just don’t see that happening.”

The S&P 500 climbed nearly 12% from early July to Friday’s close. Wall Street found relief in a better-than-expected batch of corporate earnings and the slight slowdown in US inflation, bolstering speculation that the Fed won’t need to keep raising interest rates as aggressively. . Hopes have grown that a recession can be avoided.

The problem with this thesis is that it ignores the tough decisions the central bank faces, given the possibility of inflation staying high longer than anyone wants.

“If the market really thinks the Fed [is] going to start cutting rates next year, I wish he was smoking,” Hewson said.

Already, there are signs that the sentiment is beginning to wane again. U.S. stock futures are down after the S&P 500 ended its four-week winning streak on Friday. They could continue to fall as yields on 10-year US Treasuries, which move opposite to prices, climb back towards 3%, making riskier investments less attractive. The US dollar is also appreciating, indicating a decrease in risk appetite.

Breakdown: The Fed faces a tough set of choices. The minutes of its last meeting, made public last week, highlight the issues.

The central bank said “uncertainty about the medium-term path of inflation remains high” and noted that price increases are well above its 2% target, indicating it will need to stand firm. At the same time, he said it “would become appropriate at some point to slow the pace of policy rate increases” as there is a lag between action and when the effects trickle down to the economy. whole economy.

Investors have been looking at the latter language. But how much can the Fed really relax so long as its preferred measure of inflation is more than double what it wants it to be?

“We need to bring inflation down urgently,” Minneapolis Federal Reserve Chairman Neel Kashkari said at an event last Thursday, stressing that raising interest rates was the best way to reduce inflation. demand and lower prices.

There are three Fed meetings on the schedule until the end of the year. And if the central bank is serious about bringing its target rate to between 3.75% and 4% by then, as some members have indicated, it will have to raise rates by three-quarters of a percentage point once more in September. , or go for a trio of half point raises. Neither option seems particularly accommodating.

If markets continue to rally, it could also make the Fed more likely to turn hawkish, as it wants corporate funding costs to rise, not fall, as stopping inflation remains the top priority.

Goldman Sachs told clients on Monday that “downside risks loom,” noting that the path of inflation and growth, which determines what the Fed does next, will also dictate the direction of the market.

On the radar: Attention now turns to Jackson Hole, Wyoming, where Chairman Jerome Powell is scheduled to speak at the central bank’s annual symposium later this week. Nicholas Colas of DataTrek Research notes that the S&P 500 is down only 5% since the last Jackson Hole event. Does this really reflect everything that has changed during this time?

The owner of Regal Cinemas confirmed on Monday that he was considering filing for bankruptcy, but promised “business as usual” as he tries to shore up his finances.

The latest: British company Cineworld Group said in a statement that a “voluntary Chapter 11 filing in the United States” was one of the options it was considering to try to reduce its debt burden, reports my colleague from CNN Business, Mark Thompson.

Cineworld and Regal cinemas would remain open in the meantime, he added.

Investor preview: Cineworld shares tumbled by up to 80% in London on Friday after the Wall Street Journal reported the world’s second-largest cinema chain spoke to lawyers from Kirkland & Ellis to advise them on the bankruptcy process in the United States and the United States. Kingdom.

They have rallied slightly since Friday’s rout, but are still trading nearly 60% below Thursday’s closing level.

The company struggled to stay afloat during the pandemic, when it was forced to close its cinemas around the world. It suffered a loss of $2.7 billion in 2020 and $566 million in 2021.

Cineworld said earlier last week that despite a “gradual recovery in demand” since last spring, admissions were below expectations. So far this year, U.S. box office revenues are nearly 30% lower than before the pandemic, according to Comscore, a media data company.

Cineworld blamed a limited slate of films for the lack of moviegoers, a situation that is expected to continue through the end of November.

When Meta CEO Mark Zuckerberg launched Horizon Worlds, a virtual reality social app, in France and Spain last week, he shared a photo of himself as a digital avatar, posing in front of the Eiffel Tower and green hills.

The avatar looked cheap and flat – and the internet took notice. Mememakers worked extra shifts, and Zuckerberg was quickly chastised. Twitter called the depiction “ugly on the eyes” and an “international laughing stock”.

Zuckerberg said Friday that more updates were coming and posted a photo of a more advanced avatar on Instagram and Facebook, my CNN Business colleague Ramishah Maruf reported.

“I know the photo I posted earlier this week was pretty basic – it was taken very quickly to celebrate a launch,” Zuckerberg wrote, adding that the team is “capable of so much more.” He promised that Horizon is “getting better very quickly.”

My thought bubble: Facebook and Meta are easy targets for social media users after a series of scandals have eroded public trust. But the episode underscores the stakes for Meta as it pivots to augmented and virtual reality, an effort that cost more than $10 billion last year.

Analysts see big opportunities for companies in the metaverse. But whether Facebook’s parent company is best positioned to take advantage is an open question. The graphic snafu raises doubts.

“There are many, many other players trying to do the same thing that Meta is trying to do,” CFRA Research’s Angelo Zino told CNN Business earlier this year. “And I would say there are a lot of players who are way ahead.”

Zoom Video (ZM) releases results after the close.

Coming tomorrow: S&P Global releases its latest batch of PMI data, which tracks the health of the manufacturing and services sectors of major economies.

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