Stocks traded flat this morning, caught between the year’s strongest rally and a resurgence of caution over the Federal Reserve’s next move on interest rates.
The Nasdaq Composite notched up roughly 0.3%, maintaining its upward momentum, while the S&P 500 shaved off a marginal 0.06%. The Dow Jones Industrial Average retreated slightly, shedding about 30 points, a 0.1% dip.
Market sentiment had been buoyed by indications of a cooling U.S. economy, hinting that the Fed might relax its aggressive stance. However, this optimism faced a reality check following remarks from Minneapolis Fed President Neel Kashkari. On Monday, he indicated that the central bank’s battle against inflation is far from over.
“The economy has proved to be really resilient even though we’ve raised interest rates a lot over the past couple of years. That’s good news,” Kashkari commented during a Fox News interview. Yet, he tempered this by stating, “We haven’t completely solved the inflation problem. We still have more work ahead of us to get it done.”
These words imply Kashkari’s inclination to support further rate hikes. Last week’s Federal Reserve meeting concluded with the short-term interest rate target holding steady, signaling a pause but not the end of rate increases, especially with inflation persisting above the 2% goal.
Despite recent data showing a downtrend in inflation, Kashkari expressed caution: “I’m a little nervous about declaring victory too soon,” signaling his desire for more data to inform the Fed’s future direction.
Market analyst Michael Hewson from CMC Markets UK captured that sentiment, telling Reuters, “There was quite a bit of euphoria at the end of last week on the belief that the Fed is done, the jobs market is slowing, that the US economy is going to experience a soft landing.” He added, “People have started to become a bit more clear-eyed. There is the risk that the Fed could rise again.”
Investors remain on alert for further insights from Federal Reserve officials, with speeches from the heads of the Kansas City and Dallas Feds scheduled for today, and remarks from Chair Jerome Powell expected later in the week.
Uncertainty around the Fed’s stance cast a shadow over oil markets, contributing to a drop in West Texas Intermediate crude prices below $80 a barrel for the first time in over two months, despite potential supply cuts from Saudi Arabia and Russia. Both WTI and Brent crude futures fell approximately 2.7%, to $78.68 and $82.94 a barrel, respectively.
Compounding the pressure on oil was the latest trade data from China, showing a sharper-than-expected decline in exports for October, signaling waning global demand. However, the International Monetary Fund offered a glimmer of hope, revising its GDP growth forecasts for China upwards for the current and following year.
In the corporate sphere, WeWork made headlines yesterday with its bankruptcy filing, a stark turn for what was once the U.S.’s most highly valued startup, now seeing its shares plummet by about 98% over the year.
As the earnings season rolls on, the market braces for financial disclosures from Uber and Rivian today, with the investor community particularly attuned to the upcoming Disney earnings report set for release tomorrow.
In general, it seems as though the market is preparing for a jolt lower (after a very strong week prior) even if Powell & Co. don’t sound overly hawkish. But, as we’ve mentioned over the last few days, the market is still oversold on the year, and a very strong seasonal bullish trend could already be underway.
Yes, stocks are overbought in the very short term, but any selling that occurs over the next few sessions is likely to be limited, especially now that yields are slipping again.
