The US dollar has recently achieved its highest valuation since March, propelled by an upsurge in Treasury yields and fluctuations in the stock market. Market participants are speculating that interest rates will continue to be elevated, even if the Federal Reserve concludes its tightening cycle later this month.
Simultaneously, the greenback's ascent has prompted options traders to prepare for further strengthening, evident in one-year risk reversals approaching their most bullish levels since April. Meanwhile, the ten-year US Treasury yields have increased by seven basis points, reaching 4.25%, spurred by a surge in investment-grade bond sales. The S&P 500 has remained close to the 4,500 mark, while the Nasdaq 100 has outperformed, primarily driven by notable gains in prominent companies like Tesla Inc. and Netflix Inc. Additionally, Brent crude oil has traded near the $90 per barrel range, as key OPEC+ producers extended their supply cuts.
Federal Reserve Governor Christopher Waller expressed the view that policymakers have room to exercise caution in implementing interest rate hikes, citing recent data indicating a moderation in inflation. Waller emphasized, "There is nothing that is saying we need to do anything imminent anytime soon." On a similar note, Federal Reserve Bank of Cleveland President Loretta Mester suggested the possibility of raising rates "a bit higher" but refrained from specifying the course of action for the upcoming meeting.
David Kelly, Chief Global Strategist at J.P. Morgan Asset Management, commented, "It might be more accurate to say that the Fed is sailing in shallow waters in a thick fog," highlighting the need for a deliberate and flexible approach to monetary tightening.
Goldman Sachs Group Inc. has revised its assessment, indicating a reduced 15% likelihood of the US entering a recession, down from the previous estimate of 20%. This adjustment is driven by easing inflation and the resilience of the labor market, which may obviate the necessity for further interest rate hikes.
According to Chris Senyek at Wolfe Research, recent market dynamics, characterized by the "bad news is good news" sentiment, signify a strong belief in the narratives of disinflation and a soft landing that have propelled stock prices over the past six months. Nonetheless, Senyek cautioned that potential challenges lie ahead, with expectations of stickier-than-expected inflation, a persistent price-wage spiral, higher oil prices, and continued strength in the housing market. As such, Senyek anticipates that the Federal Open Market Committee (FOMC) may raise interest rates in November and/or December.
Morgan Stanley's Michael Wilson, known for his bearish outlook, predicts disappointment for US equity investors this year, as economic growth is projected to be weaker than initially anticipated. Wilson noted, "At current prices, markets are now expecting a meaningful reacceleration in growth that we think is unlikely this year, especially for the consumer." He pointed out that the potential softening of economic data in September and October has not been factored into many stock valuations and expectations.
Despite September historically being considered the worst month for US equities, some positive market signals suggest it may not follow the usual pattern this time. Bank of America Corp.'s Chief Technical Strategist, Stephen Suttmeier, noted that when the S&P 500 gains between 10% and 20% year-to-date through August, as it has this year, it has typically led to market advancements in the final four months of the year, occurring 91% of the time with an average increase of 7.6%. If this trend persists, the S&P 500 could potentially reach as high as 4,875 before the end of 2023, representing an approximate 8% gain from its Friday closing value.
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