In a prelude to the Federal Reserve’s imminent decision, financial markets witnessed a turbulent day, marked by declining stocks and surging bond yields. Heightened oil prices have fueled speculation that interest rates might remain elevated for an extended period to counter potential inflationary pressures.

The S&P 500 index extended its September downturn, while the Nasdaq 100 experienced a 1% drop, primarily driven by losses in tech giants like Amazon.com Inc. and Nvidia Corp. Notably, five-year US bond yields briefly reached their highest point since 2007. In addition to expectations of a hawkish stance from the Federal Reserve on Wednesday, traders also cited robust Canadian inflation data, resulting in the Canadian dollar surging against major currencies. Brent oil prices soared past the $95 per barrel mark. Furthermore, Instacart is set to open at $39, a 30% increase over its initial public offering price on Tuesday.

Federal Reserve Chair Jerome Powell and his colleagues are widely anticipated to maintain the current interest rates on Wednesday. Nevertheless, the central bank faces a dilemma posed by supply shocks, particularly the upward trajectory of oil prices, which simultaneously contribute to inflation and hinder economic growth. Historical precedent, such as the US recession in the mid-1970s and early 1980s and 1990s, underscores the potential risks of surging energy costs.

Ed Moya, Senior Market Analyst for the Americas at Oanda, remarked, “The risks for headline inflation to heat up over the next couple of months are rising and that should complicate what the Fed does.” He added, “If core inflation shows it is struggling to continue to drop, the higher-for-longer rate regime will last a lot longer than the market is pricing in.”

Market sentiment has shifted from optimism about successfully addressing inflation to concerns about its resurgence, fueled by robust consumer data and the recovery of oil prices, according to Matthew Morgan, Head of Fixed Income at Jupiter Asset Management. He emphasized the need for central banks to exercise caution, waiting to assess the impact of their current policies rather than risking harm to the economy.

Additionally, Tuesday’s data revealed that new US home construction had plummeted to its lowest level since June 2020, underscoring the challenges of declining housing affordability. This sharp decline is concerning, as housing has been a resilient pillar of the economy. Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance, warned that if this trend continues, it could transform the narrative of an impervious economy to one susceptible to recession due to rapid interest rate hikes.

Photo Source: Google

19th September, 2023
Delino Gayweh
Serrari Financial Analyst