Asia open: That droopy feeling
|US stocks drooped to their most significant decline since March as yields on 10-year Treasuries punch up towards 4.50% on the back of a higher-for-longer hawkish Fed tone Wednesday afternoon. Indeed, stock pickers are experiencing an extended FOMC hangover as the lift in rates is pressuring valuation in an S&P 500 that went into this month's Fed meeting trading at a P/E of 19X
With all major US equity indices breaking below their crucial 100-day moving averages. The uniformly bearish signals across a breadth of technical and macro maven indicators triggered declines in megacap stocks, notably Amazon.com Inc. and Nvidia Corp. Indeed, the biggest pieces of the S&P 500 tend to be rate sensitive given the long run of cash flows ahead and high valuations.
The VIX index, which measures stock volatility and is often called the "fear gauge," continued to rise after hitting its lowest level since 2020 last week. The expected increased volatility over the next few weeks is valid, especially as we approach the critical October earnings season. Earnings season jitters are likely compounding the current “higher for longer “sell-off “and encouraging folks to pull even more chips off the table. During this period, companies often announce whether they will surpass or fail to reach their full-year goals; hence, corporate earnings could be viewed as a place-setter and may dictate if there is any Santa rally this year.
But of course, all this mess, especially with markets in 100 % data dependant mode, came as the latest labour market data reinforced expectations for the Federal Reserve's commitment to a higher-for-longer stance. Indeed, the “real-time “employment data fits into the double trouble zone as it marginally increases the chances that the Federal Reserve might consider hiking interest rates in November. It also reinforces the Fed's message that it intends to avoid rate cuts for as long as possible in 2024, emphasizing a more cautious stance about another inflation upswing.
The FOMC's shift away from the belief that tightening policy might negatively impact growth with a lag next year weakens the case for cutting rates. This means that inflation would likely need to decrease more than previously assumed for the FOMC to consider rate cuts.
We expect better inflation news, progress on labour market rebalancing, and a likely Q4 growth pothole will convince the FOMC not to hike again this year. However, the hawkish counterbalance is that the Fed raised the bar for rate cuts next year, causing traders to push the first cut out from Q2 2924 to Q4.
If nothing else, the Q4 potholes of unknowns (prospective government shutdown, the resumption of student loan payments and the ongoing tensions between capital and labour) should keep bond bears honest. After all, it seems more plausible, at least at this stage, that 10s fall back to 3.75 % rather than move to 5.25 %.
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