Before The Bell
Stocks bounced back strongly on Thursday following a tumble to begin the week, as concerns about the credit-worthiness of a major property developer in China abated somewhat. The Federal Reserve’s policy meeting this week also provided optimism regarding the direction of the economy.
To be sure, the real estate market in China has long had a speculative feel, as in some cases entire cities being built before any residents came to live there. The idea, which largely worked out, was to allow for expansion from nearby urban centers. But this is clearly an aggressive approach.
Similarly, China Evergrande Group, the company experiencing a downturn in fortunes, has been pushing the envelope with large amounts of debt funding. The worry is that some sort of default could create a ripple effect in the global financial system, and hurt stocks. The goal of regulators is to keep any fallout contained, although this is a fluid situation and another shoe could drop.
Back home, the Federal Reserve has firmed up plans to begin tapering its asset purchases in the near future. A decent government employment report for September would likely provide the green light, assuming market conditions are calm. The buying program could then be completed by mid-2022, with the Fed possibly hiking interest rates by the end of next year.
Stock investors viewed the Fed’s more hawkish tone in a favorable light, since it provided an indication that the economy is making steady progress. The bond market was not as sanguine about the possibility of higher rates, though, with the yield on the benchmark 10-year Treasury note rising to 1.41%, up from a lower recent range.
Signs of persistently higher inflation are pushing the Federal Reserve onto a path to raise interest rates. The Fed’s position has been that the rise in prices of late was transitory and would mostly pass as the effects of the pandemic faded. But that view has had to be updated to account for the lingering toll the Delta variant is taking on business and commerce.
One company after another is noting higher costs for labor and materials. That trend could affect sentiment if companies’ profit margins are seen as narrowing.
This morning, stock market futures are pointing moderately lower following a session that saw the Dow Jones Industrial Average soar more than 500 points; the S&P 500 jump 53 points; and the NASDAQ climb 155 points.
–Robert Mitkowski
At the time of this writing, the author did not have positions in any of the companies mentioned in this article.
