Hawkish Pause – Monday Morning Market Memo – September 25, 2023

Hawkish Pause – Monday Morning Market Memo – September 25, 2023

The major stock market averages all posted notable declines last week.  The Dow Jones Industrial Average fell 1.9% to 33,964.  The Standard & Poor’s 500 Index shed 2.9% to 4,320.  The tech-heavy NASDAQ Composite, for its part, tumbled 3.6% to 13,212.  For the S&P and NASDAQ, it was their third consecutive weekly decline, and their largest percentage decline since March.  The primary factor behind the market drop was, and has been, rising yields and a hawkish Federal Reserve.

The yield on the 10-year Treasury climbed to around 4.5% last week, hitting cycle highs, and its highest level since 2007 – according to Dow Jones Market Data.  This rate provides real competition for stocks and acts as a headwind for the overall stock market.  Along with the rise in yields on government Treasuries, the much-anticipated Federal Reserve policy meeting last week was generally more hawkish than financial markets anticipated.  For a refresher on terminology, dovish refers to cutting interest rates and a loose/expansionary monetary policy stance to stimulate the economy, while hawkish policy involves raising interest rates and tightening the money supply to fight inflation.

While the Federal Reserve did not raise interest rates last week, they left the door open for more rate hikes, indicating expectations for one more hike this year (hence the hawkish pause).  Additionally, various senior Fed officials who spoke after the meeting are supportive of a more aggressive monetary policy, confirming the message delivered by Chair Powell.  The Fed’s current projections are its policy interest rate will remain above 5% well into next year.  Bottom line, the higher for longer scenario is weighing on the stock market.

Looking at the week ahead, we’ll be analyzing a couple high profile earnings reports, along with an important read on inflation.  Costco Wholesale is scheduled to report earnings on Tuesday after the closing bell, while Nike is out with their numbers on Thursday.  On Friday, the U.S. Bureau of Labor Statistics releases August’s PCE (Personal Consumption Expenditures) Index.  This inflation data is widely followed by the Federal Reserve and is a critical input to their decision making.  Market expectations are the PCE increased by 3.4% year-over-year, while the core PCE (which excludes food and energy) is forecast to have risen 3.9%.

As always, don’t hesitate to contact us with any questions or if you would like to set up a meeting.

All the best – Southport Station Financial Management, LLC