- Equity markets rallied this week alongside a sharp retreat in bond yields. The S&P 500 rose 5.9%, led by banks and consumer discretionary.
- The Federal Reserve left interest rates unchanged, as widely expected, and market expectations that they are done tightening continued to firm.
- Meantime, the October payrolls report landed just right, with a 150k increase in jobs, a one-tick move up in the jobless rate (a little more slack helps at this stage), and cooler wage growth. In an instant, the punishing selloff in the Treasury market has turned, at least for now, with 10-year yields down almost 50 bps from when they touched 5% in mid-October.
Last week, the U.S. Federal Reserve (Fed) opted to hold interest rates steady, following through with a much-anticipated pause and causing markets to rally. Fed Chairman Jerome Powell’s comments were constructive because even though they included both hawkish and dovish perspectives, they provided additional clarity. First and foremost, Powell highlighted that higher interest rates are having their intended effect on the economy. As such, the Fed is less concerned about rising inflation than they are about the pace of it coming down. The indication from the meeting is that, as opposed to rationalizing why they should stop, they are not asking why they should raise further—a nuance that seems to imply that they’ve done enough to justify no more rate hikes. Our analysis is that Powell is willing to trade no more rate increases for a broader acknowledgement that rates will stay higher for longer—in other words, that more hikes can be avoided as long as markets realize that cuts won’t be happening in the near future. Equity markets reacted positively to this news and the U.S. dollar (USD) stayed strong, while on the bond side, the 10-year Treasury yield came down dramatically.
Bottom Line: There is momentum in markets following the Fed’s most recent announcement, which potentially sets the stage for a Q4 rally.
Bottom Line: With a resolution to the UAW strike in place, potentially severe economic consequences across sectors have likely been prevented.
Bottom Line: Given the current state of China in particular, we’re feeling somewhat less bullish on EM than we have in recent months.
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