S&P 500: -2.93% DOW: -1.89% NASDAQ: -3.61% 10-YR: 4.44%
What Happened?
Fed week in America delivered fireworks, much like most FOMC meetings have during this historic hiking cycle. Markets remained relatively calm during the first two sessions of the week, but on Wednesday afternoon, sparks flew with the release of the Federal Reserve's updated Summary of Economic Projections (SEP). The SEP revealed that a majority of committee members expect another rate hike this year, and the rate projections for the next two years were raised, signaling a policy of higher rates for a more extended period. In response to these hawkish projections, investors reacted with a downturn in equity markets during the final three sessions. Equity markets are now grappling with the challenge of justifying high embedded valuations in the face of anticipated higher rates, and there's a prevailing fear that this tightened policy outlook could disrupt economic stability. The additional threats of higher global energy prices and strikes in various market segments contribute to the fear of instability. Despite these concerns, the US economy has successfully navigated 2023's numerous challenges, leading some to hold out hope for a soft landing scenario.
Beneath the surface, all 11 sectors fished the week with meaningful losses. The anticipation of higher rates and the potential economic impact resulted in a sharp decline for Real Estate (-6.1%) and Discretionary (-6.3%) sectors. Conversely, defensive sectors like Healthcare (-1.5%) and Utilities (-2.5%) showcased greater resilience.
The Federal Reserve held rates steady at 5.25% - 5.50% for the second consecutive meeting
FOMC member's projections for future rates reveal expectations of another hike this year
The projections also indicate fewer cuts to come next year than previously thought
Members revised their economic expectations by raising the outlook for growth while lowering the unemployment rate and inflation figures
The key takeaway - As anticipated by investors, the Federal Open Market Committee (FOMC) decided to maintain its benchmark rate during its two-day September meeting. However, the updated member interest rate projections, known as the dot plot, caught investors off guard with its hawkish stance. The new dot plot revealed that a substantial majority of voting members anticipate one more interest rate hike this year, and they plan to maintain these elevated rates for an extended period before considering any potential cuts. Additionally, the FOMC increased its projections for economic robustness while revising down expectations for inflation. The unexpected hawkishness has raised concerns among investors, challenging their expectations for rate cuts next year. As investors adapt to this new outlook, adjustments in asset prices are likely, leaning towards a downward correction to factor in the impact of higher rates.
The Bank of England left its key interest rate unchanged at 5.25%, the first time since November 2021
The decision to hold was approved by the narrowest of margins, with four of the nine rate-setters preferring an increase in the key rate
The BOE didn’t rule out a further rise in its key interest rate
The key takeaway - The Bank of England is grappling with a complex and difficult decision landscape as it nears the conclusion of its current cycle of policy tightening. After tightening policy for the past year and a half, determining the correct policy rate to curb inflation without causing a sharp downturn in the UK's fragile economy proves to be a daunting task. The recent pause in rate hikes, approved by a narrow 5 to 4 vote, underscores the division within the committee regarding the appropriate course of action. It appears increasingly likely that the UK economy will slip into a recession in the coming year, yet accurately predicting the extent of damage that BOE policy may inflict remains challenging. The sharp increase in energy prices and the anticipated uptick in variable mortgage rates further darken the economic outlook.
The S&P flash U.S. services-sector index slipped to an eight-month low of 50.2 from 50.5
The S&P U.S. manufacturing-sector index rose slightly to 48.9 from 47.9
Figures above 50 represent growth
New orders fell at the "strongest pace this year," S&P said
Hiring rose across businesses and inflation lifted a bit due to higher energy prices
The key takeaway - While the S&P PMI Indexes portray a weaker economy compared to other indicators, analyzing their relative movement can provide clues into the underlying trends within the services and manufacturing sectors. In the latest report, these trends have weakened compared to the previous month. Overall activity has decelerated, and there has been a decrease in new orders—an indicator crucial for gauging future demand. The concurrent rise in the price gauge and an increase in hiring present a challenging combination for the Federal Reserve, especially given the diminishing growth readings. All in all, these figures must be taken with a grain of salt given their varied predictive performance this year, but the trend they depict underscores a more worrisome outlook.
From The Waterloo Watercooler
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Jobless claims fell to an 8-month low as applications for unemployment benefits dropped 20,000 to 201,000, according to Labor Department data
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