MAJOR INDEXES NEAR CORRECTION LEVELS
This week, stock investors have concerns as the indexes near correction levels. They will have one eye set on the Federal Reserve and the other set on earnings. The FOMC will meet on Wednesday, and the rate announcement will be made on Thursday. It is widely expected that the Fed Funds Rate will remain unchanged. Thus, the target federal funds rate will remain between 5.25% and 5.5%.
Thus, the key message or conclusion drawn from the FOMC meeting will be if a rate hike at the December 13 meeting will be more or less likely. Current market predictions sit at 22%. Also, if or when rate cuts could start in 2024, what will be the catalyst? The major catalysts to consider are all related. They are falling inflation, a weakening economy, and rising unemployment.
Last week, the major U.S. stock indexes fell, which was largely due to the mega-cap technology corporations. Google lead the way. The S&P 500 (SPY) fell 2.53% last week, closing around 4,117. The story was that it was down for four out of the five sessions. Friday’s closing price was more than 10% below the S&P’s 52-week high of 4,588.96 points reached on July 31. Thus, the benchmark U.S. indexes are entering correction territory.
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S&P sectors finished down
higher yields impacting stocks
To highlight mid-last week, the Nasdaq Composite touched the correction zone. Certainly, a key drag on the S&P 500 index and the Nasdaq 100 are the increasing bond yields. In particular, at the long end of the U.S. Yield curve, this trend is set to continue. The 10-year yields increased to over 5%, currently 5.03%. The yields on the 10-years were sitting at 4.06% just three months ago and 3.76% only six months ago.
Correction territory and short-term rates
There is a debate about whether current economic data does not warrant retaining short-term rates at current levels. Cuts in the Fed Funds rate are starting to be predicted. This is one of the debates the FOMC will be having at its meeting this week. There are increasing concerns that the U.S. economy may respond negatively if the Fed overtightens. Disinflation is a faintly emerging but very real risk. The 125-basis point increase in 10-year yields over the past six months is a warning sign.
Key Inflation Data
The U.S. PCE deflator data, the Fed’s favored inflation indicator, was in line with market forecasts. Thus, the potential impact of Fed policy predictions was little influenced. The September PCE deflator data was higher than expected, at +0.4% month-on-month. The year-on-year number of +3.4% was in line with market forecasts.
The September Core PCE deflator result of +3.7% year-on-year was in line with market predictions. The September personal income report was somewhat below estimates at +0.4%. But the September personal expenditure report was above the predicted +0.5%.
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