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Tag: fedmeeting

  • This week's Fed meeting could slam brakes on year-end stock rally

    This week's Fed meeting could slam brakes on year-end stock rally

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    The rally lifting U.S. stocks to fresh 2023 highs in the year’s home stretch could be at risk if the Federal Reserve on Wednesday crushes expectations for interest-rate cuts in 2024. 

    U.S. central bankers and investors haven’t exactly been seeing eye-to-eye about when the Fed will start easing its monetary policy, according to Melissa Brown, senior principal of applied research at Axioma. 

    Traders also have been flip-flopping on their forecasts for rate cuts over the past few months, based on fed-funds futures data.


    Oxford Economics/Bloomberg

    Given the whipsaw of recent volatility, it isn’t hard to imagine a jittery market backdrop as investors wait to hear from Fed Chairman Jerome Powell on Wednesday, even though the central bank isn’t expected to change its range for short-term interest rates. Since July, the Fed funds rate rate has been at a 22-year high in a 5.25% to 5.5% range.

    U.S. stocks advanced this year after a bruising 2022, adding big gains in November, as benchmark 10-year Treasury yields
    BX:TMUBMUSD10Y
    tumbled from a 16-year high of 5%. The Dow Jones Industrial Average
    DJIA
    closed on Friday only 1.5% away from its record close nearly two years ago. The S&P 500 index
    SPX
    booked its highest finish since March 2022, according to Dow Jones Market Data.

    Year Ahead: The VIX says stocks are ‘reliably in a bull market’ heading into 2024. Here’s how to read it.

    “I don’t see any report on the horizon that would really make them [the Fed] change their stance on where we are on monetary policy,” said Alex McGrath, chief investment officer at NorthEnd Private Wealth. It is mostly the expectation of Fed rate cuts next year that have supported stock and bond markets rallies recently, he said.

    The Dow Jones closed 9.4% higher on the year through Friday, the S&P 500 was up 19.9% and the Nasdaq Composite advanced 37.6% for the same period, according to FactSet data. 

    “We have been a little skeptical of the market’s excitement over rate cuts early next year,” said Ed Clissold, chief U.S. strategist at Ned Davis Research.

    It takes a gradual process for the Fed to move away from its monetary policy tightening, Clissold told MarketWatch. The Fed is likely to pivot its tone from being very hawkish to neutral, remove the tightening bias, and then talk about rate cuts, noted Clissold.

    The bond market on Friday already was again flashing signs of a potential rethink by investors about the path of interest rates in 2024.

    Junk bonds
    JNK

    HYG,
    often a canary in the coal mine for markets, hit pause on a rally that started in late October as benchmark borrowing costs fell, even though the sector has benefited from big inflows of funds in recent weeks.

    Treasury yields for 10-year and 30-year
    BX:TMUBMUSD30Y
    bonds also shot higher Friday, echoing volatility that took hold in mid-October. 

    Read: Investors have fought a 2-year battle with the bond market. Here’s what’s next.

    Mike Sanders, head of fixed income at Madison Investments, has been similarly cautious. “I think the market is a little too aggressive in terms of thinking that cuts are going to occur in March,” Sanders said. It is more likely that the Fed will start cutting rates in the second half of next year, he said. 

    “I think the biggest thing is that the continued strength in the labor market continues to make the services inflation stickier,” Sanders said. “Right now we just don’t see the weakness that we need to get that down.” 

    Friday’s U.S. employment report adds to his concerns. About 199,000 new jobs were created in November, the government said Friday. Economists polled by the Wall Street Journal had forecast 190,000 jobs. The report also showed rising wages and a retreating unemployment rate to a four-month low of 3.7% from 3.9%.

    The U.S. central bank will likely “try their best to push back on the narrative of cuts coming very soon,” Sanders said. That could be accomplished in its updated “dot plot” interest rate forecast, also due Wednesday, which will provide the Fed’s latest thinking on the likely path of monetary policy. The Fed’s update in September surprised some in the market as it bolstered the central bank’s stance of higher rates for longer. 

    There’s still a chance that inflation will reaccelerate, Sanders said. “The Fed is worried about the inflation side more than anything else. For them to take the foot off the brake sooner, it just doesn’t do them any good.”

    Ahead of the Fed decision, an inflation update is due Tuesday in the November consumer-price index, while the producer-price index is due Wednesday. 

    Still, seasonality factors could aid the stock market in December. The Dow Jones Industrial Average in December rises about 70% of the time, regardless of whether it is in a bull or bear market, according to historical data. 

    See: Stock market barrels into year-end with momentum. What that means for December and beyond.

    “The overall market outlook remains constructive,” said Ned Davis’s Clissold. “A soft landing scenario could support the bull market continuing.”

    Last week the Dow eked out a gain of less than 0.1%, the S&P 500 edged up 0.2% and the Nasdaq rose 0.7%. All three major indexes went up for a sixth straight week, with the Dow logging its longest weekly winning streak since February 2019, according to Dow Jones Market Data.

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  • How stock-market investors can ride out a ‘fear cycle’ as S&P 500, Nasdaq fall into correction

    How stock-market investors can ride out a ‘fear cycle’ as S&P 500, Nasdaq fall into correction

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    Many people like to feel at least a little bit of fright.

    That has been the whole point of Halloween for ages. The spooky traditions might even be a sort of hedge, a way to limit carnage should darker days lurk around the corner.

    Where it gets trickier is when fear impacts a nest egg, retirement fund or portfolio holdings. And fear of looming mayhem has been higher in October, with a sharp selloff causing the S&P 500 index
    SPX
    to break below the 4,200 level, landing it in a correction on Friday. It also joined the Nasdaq Composite Index in falling at least 10% from a summer peak.

    In addition, a brutal bond-market rout has pushed the 10-year and 30-year Treasury yields
    BX:TMUBMUSD10Y
    up dramatically, with both recently dancing around the 5% level, which can drive up borrowing costs for the U.S. economy and cause havoc in financial markets.

    “Round numbers matter,” said Rich Steinberg, chief market strategist at The Colony Group, which has $20 billion in assets under management. He said the backdrop has investors trying to figure out “where to put money” and wanting to know “where can we hide?”

    “When you get into a fear cycle, the dynamics can get out of whack with reality,” Steinberg said. He thinks investors won’t go wrong earning roughly 5.5% on shorter term risk-free Treasurys, while penciling in stock prices they like.

    “That’s where investors really get rewarded over the long-term,” he said, granted they have enough liquidity to ride out what could be elongated patches of volatility.

    Increasingly, investor worries tie back to U.S. government spending, with the Treasury Department early next expected to release an estimated $1.5 trillion borrowing need to accommodate a large budget deficit. That would unleash even more Treasury supply into an unsettled market, and potentially strain the plumbing of financial markets.

    Higher U.S. bond yields threaten to make it more expensive for the federal government to service its debt load, but they also can be prohibitive for companies, sparking layoffs and defaults.

    Fed decisions, yields

    The Federal Reserve is expected to hold its policy interest rates steady on Wednesday following its two-day meeting, keeping the rate at a 22-year high in the 5.25%-5.5% range.

    The real fireworks, however, often appear during Fed Chairman Jerome Powell’s afternoon press conference following each rate decision.

    “I firmly believe they are done for good,” said Bryce Doty, a senior portfolio manager at Sit Investment Associates, of Fed hikes in this cycle, which he notes should set up bond funds for a banner 2024, after two rough years, given today’s higher starting yields.

    Yet, Doty also sees two “wild cards” that could rattle markets. Heavy Treasury debt issuance could overwhelm liquidity in the marketplace, causing yields to go up higher and potentially force the Fed to restart its bond-buying program, he said.

    War abroad also could expand, including with the Israel-Hamas conflict, which could spark a flight to quality and push down U.S. bond yields.

    With that backdrop, Doty suggests adding duration in bonds
    BX:TMUBMUSD03M
    as longer-term yields rise above short-term yields, and the so-called Treasury yield curve gets steeper. “This is the time,” he said. Investors should “keep marching” out on the curve as it steepens.

    “Yields, in my mind, have been the main challenge for the equity market,” said Keith Lerner, chief markets strategist at Truist Advisory Services, while noting that stocks have been wobbly since the 10-year Treasury yield topped 4% in July.

    Lerner also said the near 17% drop in the powerful “Magnificent Seven” stocks, while notable, isn’t as bad as in some other S&P 500 index sectors, like real estate, were the retrenchment is closer to 20%.

    “We’ve had a pretty good reset,” he said, adding that lower stock prices provide investors with “somewhat better compensation” for the uncertainties ahead.

    “This is one of the most challenging investment environments we’ve seen in a long time,” said Cameron Brandt, director of research at EPFR, which tracks fund flows across asset classes.

    With that backdrop, he expects investors to keep more dry powder on hand through the end of this year than in the past.

    The Dow Jones Industrial Average
    DJIA
    shed 2.1% for the week and closed at its lowest level since the March banking crisis. The S&P 500 lost 2.5% for the week and the Nasdaq Composite fell 2.6% for the week.

    Another big item on the calendar for next week, beyond the Treasury borrowing announcement and Fed decision Wednesday is the Labor Department’s October jobs report due Friday.

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  • Fed’s revised dot plot for interest rates makes wall of maturing debt a bigger worry

    Fed’s revised dot plot for interest rates makes wall of maturing debt a bigger worry

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    The Federal Reserve on Wednesday surprised markets with a fortification of its higher-for-longer stance on interest rates, penciling in only half as many rate cuts next year as had been expected.

    Fed officials kept the central bank’s policy rate at a 22-year high, but redrew their so-called “dot plot,” a chart of the potential path of short-term rates over time, in a less favorable way for borrowers.

    The…

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  • Why the Fed’s next decisions on rates could lead to a wave of commercial-debt defaults

    Why the Fed’s next decisions on rates could lead to a wave of commercial-debt defaults

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    Getting staff back to the office is only part of the battle.

    Regional banks that went big lending on office properties also face a ticking time bomb of maturing debt that they helped create, particularly if the Federal Reserve holds its policy rate near the current 22-year high well into next year.

    “The area of greatest concerns for banks is office space,” says Tom Collins, senior partner focused on regional banks and credit unions at consulting firm firm West Monroe. Should rates stay high, “borrowers are going to face a tough decision of whether they refinance or default,” he said.

    The fight to bring more staff back to half-empty office buildings comes as an estimated $1 trillion wall of commercial real-estate loans is set to mature through 2024. While tenants haven’t shied away from signing up to pay top rents at trophy buildings, the same can’t be said for the rows of lower-rung properties lining financial districts in big cities.

    See: Labor Day is just a ‘milestone’ in the marathon to get workers back to the office

    The Fed embarks on a two-day policy meeting on Tuesday, with expectations running high for rates to stay steady, giving more time to study the impact of earlier rate increases.

    The central bank’s rate hikes have further complicated matters for landlords, and fresh debt for office buildings no longer looks cheap nor abundant. Regional banks also have been piling back on lending after Silicon Valley Bank and Signature Bank collapsed in March and as deposits fled for yield elsewhere.

    Related: FDIC kicks off $33 billion sale of seized assets from Signature Bank

    Loan volumes from Wall Street similarly have been anemic. This year it has produced slightly more than $10 billion in “conduit,” or multi-borrower, commercial mortgage-backed securities deals through the end of August, the least since 2008, according to Goldman Sachs. Coupons, a proxy for mortgage rates, have climbed above 7%, the highest since the early 2000s.

    “I don’t think this is a wash out here,” Collins said of the threat of more regional bank failures, but he does anticipate pain for lenders heavily exposed to lower quality class B and C office buildings in urban areas.

    Banks can help mitigate the wall of debt coming due by stepping up the pace of loan modifications to help borrowers keep properties, but Collins said he also anticipates lenders will need to increase loan sales, write downs and mergers or acquisitions.

    “There is no doubt there will be private equity and other investors that will be interested in buying some of these loans, taking them off the balance sheets of banks,” Collins said.

    “The obvious question there is at what discount?” he said, adding, “I think investors will wait until things get more dire to try to get a better deal.”

    Another offset to banks’ office exposure has been the relatively stable performance of hotels, industrial and other property types. But Collins said that if rates stay high and the economy falters, those sectors are likely to face challenges as well.

    The 10-year Treasury yield,
    BX:TMUBMUSD10Y
    a benchmark lending rate for the commercial real estate industry, was near 4.32% on Monday, hovering around a 16-year high ahead of the Fed meeting, while the policy-sensitive 2-year Treasury rate
    BX:TMUBMUSD02Y
    was near 5.06%. Stocks
    SPX

    DJIA
    were edging higher.

    Office distress intensified in August, with the special servicing rate of loans in bond deals hitting 7.72%, compared with a 6.67% rate for all property types, according to Trepp, which tracks the commercial mortgage-backed securities market. A year ago, the rate of problem office loans was 3.18%.

    “If I was an investor, I would be patient around this, because values are only going to come down, I would imagine,” Collins said.

    Check out: Powell could still hammer U.S. stocks on Wednesday even if the Fed doesn’t hike interest rates

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