Will the Fed matter this time?


Stock investors are treading cautiously ahead of the Federal Reserve’s two-day policy meeting that begins today. It should be noted that despite the massive volatility seen throughout October, all three indices closed the month with double-digit gains.

Bulls versus Bears

For the Dow Jones, a +14% gain in October was its best performance since 1976. Bulls are hoping any signs that the central bank will slow rate hikes in December and beyond will fuel another surge in bond prices. equities and maybe even help indices to turn positive by the end of the year.

The bears argue that more accommodative monetary policy from the Fed is not enough to push stocks into positive territory as companies still face a host of issues, including a slowing economy on top of costs. operating highs that can be much slower to come down than Wall Street. hoping.

Expectations that the Fed will have to maintain tighter monetary policy for longer also continue to trouble bond markets, with yields on 2-year Treasuries significantly higher than those on 10-year Treasuries.

Yields

When short-term yields are higher than long-term yields, aka a “yield curve inversion,” some believe this is a sign of a coming recession. Others argue that generally reliable bond market signals are being skewed right now due to the rapid pace of Fed interest rate hikes.

There are fears that the fallout from the bonds could create a liquidity crisis in the $24 trillion US Treasury market, with volatility making the operation more costly for primary traders.

Remember that when bond yields rise, bond prices fall. Demand for U.S. government debt already in circulation has fallen off a cliff due to the much lower interest rates at which it has been issued, and some fear this will turn into an unwanted glut of debt that is driving further down the price of bonds.

This in turn raises expectations for some sort of US Treasury intervention, likely in the form of buybacks as a means of injecting liquidity and stabilizing the market.

Bond investors are hoping the Treasury Department will come up with a plan this week, though the start of actual redemptions isn’t expected to be immediate. If the Treasury fails to address the issue, some insiders fear that bond market volatility could spike further and put stocks under pressure again.

Data to monitor

Today, investors will digest the ISM Manufacturing, Construction Spending and the Job Openings and Labor Turnover Survey (JOLTS). The JOLTS report in particular will be watched closely after job postings plummeted by more than -1 million in August. Wall Street insiders expect a less steep decline in September, with the consensus looking for a figure around 9.875 million, down from 10.05 million previously.

On the earnings front, highlights today include Advanced Micro Devices, Airbnb, BP, Eli Lilly, Pfizer, Phillips 66 and Uber.

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