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Wall Street gears up as Fed comes to ‘hawkish pause’

NEW YORK (BLOOMBERG) – 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, saw stocks, bonds and the dollar move minimally.

The S&P 500 closed near 4,450. Brent oil pared gains after almost hitting USD95 a barrel earlier Monday in a move that added to inflation concerns. Apple climbed, while Tesla dropped as Goldman Sachs lowered its earnings estimates for the electric-vehicle giant. Treasury 10-year yields edged lower while those on two-year notes remained above 5 per cent.

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 across half of the Group of 20. Advanced-economy central banks may draw particular focus as global policymakers adapt to the theme US officials set out at Jackson Hole in August: Rates will likely stay higher for longer.

With the Fed widely expected to keep rates on hold this week, traders will be focused on the so-called dot plot summary of economic forecasts. The two main questions are whether policymakers will retain their projections for one more 25 basis-point hike by year-end – and how much easing they are pencilling in for 2024. In June, they projected 1 percentage point of cuts.

“We think the Fed will take a ‘hawkish pause’ this week and the futures market will re-price a higher probability for another rate hike before year end,” said Megan Horneman, chief investment officer at Verdence Capital Advisors. “Unfortunately, inflation is very easy to reignite especially if energy prices begin to filter into broad prices. Therefore, we think the Fed will need to insinuate they may not be done raising rates.”

The Fed will probably continue to sound hawkish, with one remaining hike still pencilled in for 2023 and the prospect of very slow easing over the couple of years, according to David Kelly, chief global strategist at JP Morgan Asset Management. Still, while policymakers may plan for a gentle drop in rates, there’s risk of an economic downturn that would trigger much more rapid easing, he noted.

A Nvidia GH200 Grace Superchip arranged at the company’s headquarters in Santa Clara, California, US on June 5, 2023. PHOTO: BLOOMBERG

“It makes sense to be well diversified, with a relatively defensive position across equities and extending duration in within fixed income, as the risk of an economic stumble grows on the descent from the mountain of monetary tightening, Kelly added.

Lisa Shalett at Morgan Stanley Wealth Management says that while bullish investors have continued to harp on progress for headline inflation, a key metric closely watched by Fed Chair Jerome Powell suggests a “higher-for-longer” rate path.

“US equity markets are definitively pricing a successful soft landing, with rates peaking and economic and corporate earnings growth reaccelerating,” she noted. “We remain skeptical of the growth reacceleration/margin expansion argument of the bull case. At best, we see US equities rangebound over the next six to nine months, with the back and forth between earnings and multiples producing only churn.”

To Paul Nolte at Murphy & Sylvest Wealth Management, the two weakest months of the year are living up to expectations and following the typical pattern.

“That playbook would argue for further weakness into mid/late October before a year-end rally,” Nolte added. “Much of the rally is on the back of expectations that earnings will rise this quarter. Those higher earnings typically push stocks higher, but much of the market is already richly priced on a historical basis, so there may not be much room to push.”

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