Weekly Market Update: October 2, 2023
The Federal Reserve paused on the interest-rate front at its September Federal Open Market Committee (FOMC) meeting. The central bank wants to see what the full effects of raising the benchmark short-term interest rate 11 times over the last 19 months (from near-zero to a range of 5.25%-5.50%) will have on inflation. Stronger-than-expected price gains in August suggest the Fed may have more work to do on the tightening front.
The monetary policy stance of the Fed has not changed. Federal Reserve Chairman Jerome Powell did not rule out the possibility of another hike before the end of this year, and this hawkish posture now has Wall Street thinking that the central bank will not reverse monetary policy course until well into 2024. This put upward pressure on the value of the U.S. dollar and Treasury market yields.
The Fed’s path to orchestrating a soft landing for the U.S. economy is plausible, though risks exist. The likelihood that interest rates will remain higher for an extended period will raise the cost of capital for businesses. This may result in slower loan growth, which hurts economic expansion. The U.S. consumer also faces some tough spending decisions, as credit card balances with higher financing rates mount. On point, Goldman Sachs recently noted that credit card companies are seeing losses rise at the fastest rate since the Great Recession. Add to this the jump in oil prices, which makes it more expensive for companies to run their businesses and for families to manage their household budgets.
Higher borrowing costs have taken a recent toll on the housing market. Both new and existing home sales weakened in August. This is weighing on builder sentiment, with housing starts, a strong indicator of future residential construction, coming in below forecasts last month. According to the National Association of Home Builders/Wells Fargo Index, builder sentiment fell to 45 in September, which indicates pessimism among homebuilders.
Conclusion: The U.S. equity market is facing several headwinds right now, including stubbornly high inflation, a hawkish Federal Reserve, and a United Auto Workers (UAW) strike that threatens to hurt auto production. In this environment, we believe that investors should exercise some caution.