All eyes will be on the Federal Reserve's monetary policy decision (at 2:00 P.M. EDT), following the conclusion of its two-day Federal Open Market Committee (FOMC) meeting. Most traders anticipate that the central bank will hike the benchmark short-term interest rate by 0.75%, with a small minority betting on a full-percentage-point hike.
Investors will also closely examine at the accompanying Fed statement to determine how the lead bank will manage interest rates going forward. Moreover, traders will look to see if there is any further clarification on quantitative tightening associated with the shrinkage of the Fed's bloated balance sheet, which would decrease the liquidity in the financial system and the money supply. Overall, higher interest rates raise borrowing costs and may lead to a reduction in business investment and consumer spending. If the Fed is determined to be hawkish—or more likely to aggressively tighten monetary conditions—stocks could fall from current levels, while a dovish Fed would be a positive catalyst for equities.
The futures market inched higher last night after an initial decline, following a weak day of trading yesterday. The stock market declined throughout much of the day before bouncing slightly in the final hour of trading. Overall, the S&P 500 finished down 44 points; the NASDAQ was off 110 points; and the Dow Jones Industrial Average declined 313 points. The futures markets recovered some through the evening hours and remained in the positive territory this morning, suggesting a higher start to the trading day.
Market breadth was negative yesterday, as declining issues outpaced advancers by a 4.7-to-1.0 ratio. All 11 equity groups were lower yesterday, with the REITs showing the largest losses. On the other hand, consumer staples equities performed the best, on a relative basis.
In commodity news, oil prices declined along with the broader stock market. Traders were likely pricing in lower future demand if the economy were to fall into a recession. Meantime, U.S. Treasury bond yields were mixed, with rates on short-term Treasury notes rising, while those of long-term durations fell. The yield curve remains inverted, which usually predicts a recession. Elsewhere, the CBOE Volatility Index (or VIX) rose yesterday, as demand for options protection increased.
Looking ahead, several economic reports will be released in the coming days, including initial jobless claims and leading economic indicators on Thursday and the S&P U.S. Services and Manufacturing Purchasing Managers Indices for September on Friday. On the earnings front, only a few dozen companies are on the docket, which will not take the investment community’s attention away from the Federal Reserve’s monetary policy decision.
− John E. Seibert III
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
