Market Pulse

In focus

The Federal Reserve (Fed) met last week and showed their continued commitment to combatting inflation with another 0.75% rate hike. This outsized hike was anticipated by most. Their summary of economic projections surprised markets with how many rate hikes they still think are needed and how long they may hold at a high level.

The 2-year U.S. Treasury yield, which is sensitive to monetary policy, rose above 4.2% in anticipation of this more aggressive Fed. The 2-/ 10-year yield curve remains inverted and close to the lowest level since 2000. The depth of inversion doesn’t necessarily indicate the level of economic pain ahead, but more reflects the conviction of the bond market that economic slowing is still to come. Stocks also felt this pain with the S&P 500 down about 4.6% last week and down over 14% from the mid-August high.

On the international front, British markets were hit hard on Friday and again on early Monday as U.K. Prime Minister Liz Truss released her new plan to help consumers. Markets interpreted it as more inflationary and adding to the country’s overall debt burden, sending stocks, bonds, and the pound into a tailspin. U.K. bond yields’ sharp rise added to the upward pressure for yields in the U.S. The higher yields have affected stock markets as the relative attractiveness of stocks dwindles relative to bonds and the higher yields weigh on stocks’ valuations. Not only do equities have to contend with a potential global slowdown, but also now with competitive bond yields, which have become productive for investors’ portfolios again.

A look back

• Global stocks declined by more than 4% again last week, dragged down by Europe. The S&P 500 fell 4.6% while international developed markets were down 5.6% and emerging markets dropped by 4%.
• Yields around the world rose last week, including in the U.S. The 2-year U.S. Treasury yield rose by more than 0.30% to trade above 4.2%. The 10-year yield jumped by 0.25%, further inverting the yield curve.
• Italy is poised to have its first female Prime Minister after a coalition led by Giorgia Meloni won the election. A government still needs to be formed.

A look ahead

• A week after the Fed met, regional Fed Presidents and Governors are out speaking to the public. There will be 24 total public speeches this week alone to try to give more context to what the Fed is thinking, and investors will be paying very close attention.
• Economic releases: Durable Goods Orders, Conference Board Consumer Confidence, New & Pending Home Sales, Personal Income & Spending, Core Personal Consumption Expenditures, Revised Q2 GDP.

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