Stocks, bonds and the dollar saw slight moves at the start of a busy week for major central banks, whose rate decisions will set the tone for global markets for the rest of the year.
The S&P 500 closed near 4,450. Brent oil pared gains after nearly hitting $95 a barrel earlier Monday, a move that added to inflationary concerns.
Apple climbed, while Tesla fell as Goldman Sachs lowered its profit estimates for the electric vehicle giant.
Yields on the 10-year Treasury fell slightly while those on two-year bonds remained above 5%.
Starting with the Federal Reserve on Wednesday and ending with the Bank of Japan two days later, monetary policy will be determined at key meetings among half of the Group of 20.
Central banks in advanced economies could draw particular attention as global policymakers adjust to the theme laid out by U.S. officials at Jackson Hole in August: Rates are likely to stay high for longer.
While the Fed is widely expected to keep rates unchanged this week, traders will focus on what is known as the bullet point summary of economic forecasts.
The two main questions are whether policymakers will maintain their forecast of another 25 basis points hike by the end of the year – and how much easing they envisage for 2024.
In June, they predicted cuts of 1 percentage point.
“We believe the Fed will take a ‘hawkish pause’ this week and the futures market will reassess the likelihood of another rate hike before the end of the year,” said Megan Horneman, chief investment officer at Verdence Capital Advisors.
“Unfortunately, inflation is very easy to reignite, especially if energy prices start to feed through to general prices. Therefore, we think the Fed will have to hint that it may not be finished raising rates.
The Fed will likely continue to appear hawkish, with one remaining hike planned for 2023 and the prospect of very slow easing over the next two years, according to David Kelly, chief global strategist at JP Morgan Asset Management.
Still, even if policymakers consider a slight rate cut, there is a risk of an economic slowdown that would trigger much faster easing, he noted.
“It makes sense to be well diversified, with a relatively defensive position in equities and extended duration in fixed income, as the risk of an economic downfall increases the further down the monetary tightening mountain one goes “Kelly added.
Morgan Stanley Wealth Management’s Lisa Shalett says that while bullish investors have continued to emphasize progress in headline inflation, a key indicator closely watched by Fed Chairman Jerome Powell suggests a path of “higher” rates for longer.”
“US stock markets are definitely pricing in a successful soft landing, with rates peaking and economic growth and corporate profits reaccelerating,” she noted. “We remain skeptical of the bull case’s argument for growth reacceleration and margin expansion.
At best, we expect U.S. stocks to be range-bound over the next six to nine months, with the back-and-forth between earnings and multiples producing only churn.
For Paul Nolte of Murphy & Sylvest Wealth Management, the weakest two months of the year lived up to expectations and followed the usual pattern.
“This scenario would argue for further weakness through mid/late October before a year-end rally,” Nolte added. “Much of the rally is driven by expectations of higher profits this quarter.
“These higher earnings generally push stocks higher, but much of the market is already valued on a historical basis, so there may not be much room to move.”
Stocks, bonds and the dollar saw slight moves at the start of a busy week for major central banks, whose rate decisions will set the tone for global markets for the rest of the year.
The S&P 500 closed near 4,450. Brent oil pared gains after nearly hitting $95 a barrel earlier Monday, a move that added to inflationary concerns.
Apple climbed, while Tesla fell as Goldman Sachs lowered its profit estimates for the electric vehicle giant.
Yields on the 10-year Treasury fell slightly while those on two-year bonds remained above 5%.
Starting with the Federal Reserve on Wednesday and ending with the Bank of Japan two days later, monetary policy will be determined at key meetings among half of the Group of 20.
Central banks in advanced economies could draw particular attention as global policymakers adjust to the theme laid out by U.S. officials at Jackson Hole in August: Rates are likely to stay high for longer.
While the Fed is widely expected to keep rates unchanged this week, traders will focus on what is known as the bullet point summary of economic forecasts.
The two main questions are whether policymakers will maintain their forecast of another 25 basis points hike by the end of the year – and how much easing they envisage for 2024.
In June, they predicted cuts of 1 percentage point.
“We believe the Fed will take a ‘hawkish pause’ this week and the futures market will reassess the likelihood of another rate hike before the end of the year,” said Megan Horneman, chief investment officer at Verdence Capital Advisors.
“Unfortunately, inflation is very easy to reignite, especially if energy prices start to feed through to general prices. Therefore, we think the Fed will have to hint that it may not be finished raising rates.
The Fed will likely continue to appear hawkish, with one remaining hike planned for 2023 and the prospect of very slow easing over the next two years, according to David Kelly, chief global strategist at JP Morgan Asset Management.
Still, even if policymakers consider a slight rate cut, there is a risk of an economic slowdown that would trigger much faster easing, he noted.
“It makes sense to be well diversified, with a relatively defensive position in equities and extended duration in fixed income, as the risk of an economic downfall increases the further down the monetary tightening mountain one goes “Kelly added.
Morgan Stanley Wealth Management’s Lisa Shalett says that while bullish investors have continued to emphasize progress in headline inflation, a key indicator closely watched by Fed Chairman Jerome Powell suggests a path of “higher” rates for longer.”
“US stock markets are definitely pricing in a successful soft landing, with rates peaking and economic growth and corporate profits reaccelerating,” she noted. “We remain skeptical of the bull case’s argument for growth reacceleration and margin expansion.
At best, we expect U.S. stocks to be range-bound over the next six to nine months, with the back-and-forth between earnings and multiples producing only churn.
For Paul Nolte of Murphy & Sylvest Wealth Management, the weakest two months of the year lived up to expectations and followed the usual pattern.
“This scenario would argue for further weakness through mid/late October before a year-end rally,” Nolte added. “Much of the rally is driven by expectations of higher profits this quarter.
“These higher earnings generally push stocks higher, but much of the market is already valued on a historical basis, so there may not be much room to move.”
