Fed pressures the market
The market suffered through a sizable decline this week. All 11 S&P 500 sectors finished in the red this week. The consumer discretionary (-6.4%), real estate (-5.4%), and materials (-3.7%) were the laggards while the health care sector (-1.2%) was down the least.
The catalyst for the weakness was a jump in Treasury yields. The 2-yr note yield climbed eight basis points this week to 5.12%. The 10-yr note yield climbed 12 basis points this week to 4.44%. Including this week’s move, the 10-yr note yield is up 35 basis points this month. Those moves were largely in response to the Fed’s hawkish pause on Wednesday.
As expected, the FOMC voted unanimously to leave the target range for the fed funds rate unchanged at 5.25-5.50%. There were few changes to the directive itself, but the market was focused on the Summary of Economic Projections and dot plot. The two key takeaways were that rates are anticipated to remain higher for longer and that Fed officials are not expecting to cut rates in 2024 as much as they were anticipating when they updated their forecasts in June.
Fed Chair Jerome Powell said at his press conference that the Fed is going to “proceed carefully” when thinking about making a policy move, but said it’s plausible that the neutral rate is higher than the longer run rate (2.5%), which he said is part of the explanation for why the economy has been more resilient than expected.
The wrinkle for the market wasn’t that the Fed is decidedly hawkish at this point, it was that the Fed is still not dovish. Other Fed officials echoed Mr. Powell’s view later in the week, Specifically, San Francisco Fed President Daly, Fed Governor Bowman, and Boston Fed President Collins all made similar comments on Friday.
The UAW (United Auto Workers) extended its strike to all General Motors (GM) and Stellantis (STLA) parts and distribution centers beginning on Friday. This followed confirmation that the UAW made progress on labor talks with Ford (F), but indicated that STLA and GM are going to need “serious pushing.