- The stock market dipped last week after the midterm elections.
- Data on Friday revealed that the US economy added an unexpected 165,000 jobs in October.
- Market participants are now looking forward to the US CPI and PPI numbers.
Equities rallied on Monday, recovering some of the losses made last week, as oil prices fell, easing inflation concerns. Oil dropped as the likelihood of an escalation in the Iran war fell after the midterm election. Initially, stocks had collapsed amid a tech rout due to AI concerns.
Brent futures (Source: Bloomberg, ICE)
The stock market dipped last week after the midterm elections, where Democrats took the lead in the Senate and the House. The tech sector suffered the most as investors worried that Democrats would push for more regulations on AI. Before that, there were concerns about the heavy borrowing in the sector and whether it would translate to profits. To make matters worse, inflation concerns have forced the Fed to assume a hawkish stance, increasing the likelihood of higher borrowing costs.
Notably, data on Friday revealed that the US economy added an unexpected 165,000 jobs in October. At the same time, the unemployment rate fell from 4.2% to 4.1%, indicating a robust labor market.
The data gives the Fed enough room to increase borrowing costs and tame inflation. Some policymakers like John Williams noted that the economy remained resilient despite recent energy shocks. However, with inflation still high, rate hikes are necessary. As a result, market participants are pricing in a higher 79% chance of a hike in December.
However, the trend reversed this week as focus shifted to declining oil prices. Moreover, some believe traders are buying last week’s dip in the hopes that the rally will resume.
“This does not mean that the tech sell-off is done and dusted. While there is some evidence that investors are taking advantage of last week’s plunge to increase their exposure to chip and other AI-adjacent stocks, there’s a danger that it may be a little bit premature to load up and ‘buy the dip,’” said David Morrison, senior market analyst at Trade Nation.
Analysts also believe Democrats will pressure the president to end the expensive Iran war.
On Sunday, Trump said he was unlikely to attack Iran if talks progress well, sending oil lower. However, experts say the risk of an escalation remains.
Market participants are now looking forward to the consumer and wholesale inflation numbers due later on Tuesday.