Stock investors are treading cautiously ahead of the Federal Reserve’s two-day policy meeting that begins today. It’s worth noting that despite the massive volatility witnessed throughout October, all three indexes closed out the month with double-digit gains.
Bulls vs bears
For the Dow, a gain of +14% in October was its best performance since 1976. Bulls are hoping any signs that the central bank will slow down rate hikes in December and beyond will fuel another surge in stock prices and perhaps even help indexes turn positive by the end of the year.
Bears argue that more accommodative monetary policy from the Fed is not enough to push stocks into positive territory as companies still face a multitude of problems, including a slowing economy on top of elevated operating costs that may be much slower to come down than Wall Street is hoping.
Expectations that the Fed will need to maintain tighter monetary policy for longer is continuing to roil bond markets as well with yield’s on the 2-year Treasury note firmly above that of the 10-year.
When shorter-term yields are higher than longer-term yields, aka a “yield curve inversion,” some believe it is a signal of a future recession. Others argue that typically reliable bond market signals are skewed right now because of the Fed’s rapid pace of interest rate hikes.
There are concerns that the fallout in bonds risks creating a liquidity crisis in the $24 trillion US Treasury market, with volatility making it more expensive for the primary dealers to operate.
Remember, as bond yields rise, bond prices drop. Demand for US government debt already in circulation has fallen off a cliff due to the far lower interest rates it was issued at, and some worry this could grow to a glut of unwanted debt that further forces down the price of bonds.
That in turn is raising expectations for some sort of intervention from the US Treasury, likely in the form of buybacks as a way to inject liquidity and stabilize the market.
Bond investors are hoping the Treasury department will outline a plan this week, though the beginning of actual buybacks isn’t expected to be immediate. If the Treasury fails to address the issue, some insiders worry that bond market volatility could spike further and again put stocks under pressure.
Data to watch
Today, investors will be digesting ISM Manufacturing, Construction Spending, and the Job Openings and Labor Turnover Survey (JOLTS). The JOLTS report in particular will be closely watched after job openings fell by over -1 million in August. Wall Street insiders are expecting a less steep decline in September with consensus looking for a number around 9.875 million, versus 10.05 million previously.
On the earnings front, highlights today include Advanced Micro Devices, Airbnb, BP, Eli Lilly, Pfizer, Phillips 66, and Uber.
Will Fed Matter This Time?
Wishing you a great week!
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