Stocks trimmed their losses at the start of a busy week for earnings, with investors awaiting Wednesday’s Federal Reserve decision for clues on whether officials will dial back the pace of rate increases as early as December.
(Bloomberg) — Stocks trimmed their losses at the start of a busy week for earnings, with investors awaiting Wednesday’s Federal Reserve decision for clues on whether officials will dial back the pace of rate increases as early as December.
Energy shares led gains in the S&P 500, while big tech slumped and bond yields climbed with the dollar. Swap markets are pricing in a 75-basis-point hike this week amid the Fed’s most-aggressive tightening campaign in four decades. The outlook for the following meetings is less certain, with traders seeing a “coin toss” between an increase of that size and a 50-basis-point boost in the final month of 2022.
Financial indicators such as the inversion of the yield curve between 10-year and three-month Treasuries “all support a Fed pivot sooner rather than later,” wrote Morgan Stanley’s Michael Wilson. Separately, Goldman Sachs Group Inc. strategists said the potential slowdown in tightening, light positioning and anticipation of strong fourth-quarter seasonality had lifted equity markets in recent weeks.
“Much has been said about the potential for a pivot toward a slower cadence of tightening,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets. “The larger uncertainty is whether this ‘pivot lite’ is interpreted as the beginning of the end of the Fed’s hawkish stance or simply an indication that tighter for longer will be the new norm.”
The latest MLIV Pulse survey suggests that if Fed Chair Jerome Powell gives any dovish signals this week, he might send investors scrambling.
Almost half of 250 respondents polled last week said they were buying the dollar ahead of the November meeting, and about 78% expected two-year yields to go up. These bets could go sour if Powell suggests a step down toward a 50 basis-point increase in December, or quarter-point moves to finish off the hiking cycle in early 2023.
Read: Treasury Strategists Mull Fed Pivot Fallout: Research Roundup
Although October can evoke fear on Wall Street following stock market crashes in 1929, 1987 and 2008, it’s living up to its reputation as the best month in US midterm election years. Now traders are holding out hope this October will follow a historical pattern of being a “bear-market killer” following a turbulent year for equities.
And when it comes to elections, the fourth quarter of midterm years and the following first quarter historically have been the two strongest of the 16-quarter presidential cycle, delivering average gains of 6.4% and 6.9% respectively for the S&P 500, according to investment research firm CFRA.
To Jason Draho at at UBS Global Wealth Management, while the recent rally in stocks didn’t really look sustainable, that doesn’t mean markets can’t keep grinding higher in coming weeks, “provided that the Fed and labor and inflation data don’t disappoint.”
“A sustainable rally is unlikely until investors have certainty on the end of Fed rate hikes and economic activity is close to troughing,” Draho noted, adding that neither is likely until at least the first quarter. “But of the upcoming data and events, positive news on labor market cooling should do the most to favorably shift the medium-term risk-reward outlook.”
Elsewhere, euro-area inflation surged to a fresh all-time high, while the bloc’s economy lost momentum — reinforcing fears that a recession is now all-but unavoidable. The region’s bond yields climbed, while the common currency fell.
Key events this week:
- Reserve Bank of Australia policy decision, Tuesday
- US construction spending, ISM manufacturing index, Tuesday
- EIA crude oil inventory report, Wednesday
- Federal Reserve rate decision, Wednesday
- US MBA mortgage applications, ADP employment, Wednesday
- Bank of England rate decision, Thursday
- US factory orders, durable goods, trade, initial jobless claims, ISM services index, Thursday
- ECB President Christine Lagarde speaks, Thursday
- US nonfarm payrolls, unemployment, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.3% as of 11:45 a.m. New York time
- The Nasdaq 100 fell 1%
- The Dow Jones Industrial Average was little changed
- The Stoxx Europe 600 rose 0.5%
- The MSCI World index fell 0.2%
Currencies
- The Bloomberg Dollar Spot Index rose 0.7%
- The euro fell 0.9% to $0.9877
- The British pound fell 1% to $1.1496
- The Japanese yen fell 0.8% to 148.80 per dollar
Cryptocurrencies
- Bitcoin fell 1.6% to $20,368.31
- Ether fell 1.7% to $1,567.4
Bonds
- The yield on 10-year Treasuries advanced two basis points to 4.03%
- Germany’s 10-year yield advanced three basis points to 2.13%
- Britain’s 10-year yield advanced four basis points to 3.52%
Commodities
- West Texas Intermediate crude fell 1.3% to $86.75 a barrel
- Gold futures fell 0.3% to $1,640.30 an ounce
–With assistance from Vildana Hajric and Isabelle Lee.
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