Market Pulse

Market Pulse

November 1, 2021

In focus

This will be an important week for the Federal Reserve (Fed) as the interest-rate setting Federal Open Market Committee (FOMC) is expected to announce the tapering of asset purchases. Fed Chair Powell is expected to reiterate that rate hikes and tapering are independent of each other. Investors will also listen for how Chair Powell talks about inflation risks as well as progress in the labor market, since that might give hints about any timeline or pace of rate hikes. This is also likely the last FOMC meeting before President Joe Biden announces whether Chair Powell will be nominated for another term.

Additionally, Chair Powell’s press conference will be important since the message in the markets is that investors don’t believe the Fed will stick to its new framework and will hike rates prematurely. That message has shown up as the market has penciled in more than two full rate hikes (0.50%) in 2022 which has resulted in 10-year Treasury yields falling and the yield curve flattening. We have also seen the growth style outperform the value style since investors think the Fed will make a policy mistake by hiking rates too quickly, which has hurt the reflation trade. The weight of the evidence in our work continues to suggest that the pace of rate hikes will be slower than the market expects. Our view is that the Fed will stick to its new framework and that inflationary pressures are largely transitory, even as inflation will likely stay above pre-pandemic levels. We still maintain a value bias within equities and are short duration within fixed income. As the market’s concerns over near-term inflation and an overly-aggressive Fed response ease, we believe these areas will outperform.

A look back

  • Global stocks were mixed on the week. The MSCI ACWI ended the week in positive territory, boosted by U.S. stocks while equities in international developed and emerging markets finished in the red.
  • Treasury yields fell during the week, ending October at their lowest levels since the beginning of the month.
  • U.S. economic growth was 2.0% on an annualized basis during the third quarter, slower than the second quarter pace of 6.7%. The spread of the Delta variant as well as supply chain disruptions in the auto industry crimped growth during the quarter.

A look ahead

  • This week’s meeting of the interest-rate setting Federal Open Market Committee (FOMC) will be watched closely by market participants. The tapering of asset purchases is expected to be announced, while Fed Chair Powell is expected to reiterate that rate hikes are not imminent.
  • Economic releases: ISM & Markit Manufacturing and Services, ADP Employment Change, Factory Orders, Durable Goods Orders, FOMC rate decision, Nonfarm Payrolls, Langer Consumer Comfort.

 

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