It's Fed Week: Rate Pause Baked into Markets, But Dollar, Yields, Oil Still Pose Headwinds

With the Fed meeting looming, trading might continue its recent choppy ways early this week. Mega-cap stocks continued their weakness early Monday, potentially hurting market-cap weighted indexes. The Fed's rate and economic projections loom large, but no hike is expected.
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Key Takeaways

  • Bearish indicators keep flashing as Treasury yields, dollar, and crude oil near recent highs
  • Fed meeting starts tomorrow with investors expecting a rate pause, but tone and projections seen key

  • “Mega-cap” stocks mostly lower in premarket trading after Friday’s weakness, a bearish indicator

(Monday market open) “Risk-off” lights flashed early Monday as Fed Week began, with rising Treasury yields and crude oil potentially limiting stock rallies. Mega-cap stocks, which lost ground Friday, remained in the red in premarket trading this morning and could keep the pressure on market-cap weighted indexes.

Friday’s disappointing performance sent the S&P 500® Index (SPX) to its second consecutive losing week just a day after a broad-based rally. Worries about inflation and this week’s Federal Open Market Committee (FOMC) meeting helped pop the balloon, and it wouldn’t be surprising if trading remained defensive and choppy ahead of Wednesday’s rate decision. The Fed is expected to leave rates unchanged for the second time in the last three meetings.

Today’s light on economic data, but numbers released Friday appeared to exacerbate concerns that the Fed might sound hawkish on Wednesday and project interest rates to remain higher for longer. Import and Export Prices surprised to the upside, and so did Industrial Production.

Morning rush

  • The 10-year Treasury note yield (TNX) is up nearly 2 basis points to 4.34%.
  • The U.S. Dollar Index ($DXY) is flat at 105.29, near recent highs.
  • Cboe Volatility Index® (VIX) futures jumped sharply to 14.72 after posting a new 2023 low last week.
  • WTI Crude Oil (/CL) climbed slightly to $91.20 and posted a new 2023 high.

The closely watched 10-year Treasury note yield climbed above 4.3% on Friday, near the 2023 closing high of 4.34%. It appears participants aren’t comfortable with stocks when the 10-year yield exceeds 4.3%. Stocks performed best last week when yields fell below that. Yields rose again this morning.

As some economists point out, when investors can get 5% or better yields on Treasury notes—as they can now with the 2-year Treasury note—that poses tough competition for stocks, especially those that seek to lure investors with dividends. A rising dollar threatening earnings prospects for many companies is another weight, as is expensive crude oil. Crude is up 16% in the last three weeks.

What to watch

Week ahead: The FOMC meeting starts tomorrow and ends Wednesday afternoon with an interest rate decision and fresh economic and rate projections (see more below). Aside from that, the August Housing Starts and Building Permits report on Tuesday is one to watch. On the earnings front, we’ll hear from FedEx (FDX), KB Home (KBH), and Darden Restaurants (DRI) later in the week.

The Bank of England (BoE) also meets, with a rate decision scheduled Thursday. The BoE raised rates a quarter point in August to 5.25%, saying in its statement that inflation is falling and the labor market remains “tight.” The Bank of Japan (BoJ) announces a decision Friday.

House search: Tomorrow’s housing data come shortly before the opening bell. Both starts and permits tracked slightly higher in July but below spring peaks. Single-family units led gains. Analysts expect August permits to inch higher to a seasonally adjusted annual rate of 1.445 million, according to Trading Economics. Starts are seen lower at a seasonally adjusted annual rate of 1.44 million.

If the numbers meet expectations, the report isn’t likely to have much impact. However, a miss could spark concerns about housing inflation. The country still faces a shortage of new homes, especially single-family ones. Rising shelter costs helped fuel inflation over the last year.

Other data are sparse, but last week featured some green shoots in the lackluster global manufacturing picture, including better-than expected U.S. and Chinese industrial production. U.S. Capacity Utilization also reached a four-month high, though manufacturing capacity remained below its long-term average.

Stocks in Spotlight

Strike impact: If you’re thinking about any possible effect the United Auto Workers (UAW) strike may have on the U.S. September Nonfarm Payrolls report, it’s too early to tell. We’re already past the period in which the government collects data for that report. The strike would also have to last two to three weeks to influence October data, which aren’t released until early November. The government does take strikes into account in its reports, and big telecommunications strikes earlier this century caused large employment changes in the data. There can also be secondary effects on the employment data if other industries affected by the strikes lay off workers. There was no progress over the weekend in terms of a settlement.

Tech trails: Technology shares were among the market’s weakest performers Friday after Reuters reported Taiwan Semiconductor Manufacturing Co. (TSMC) had told its major suppliers to delay delivery of high-end chipmaking equipment because of demand concerns. The Philadelphia Semiconductor Index (SOX) sank more than 3% to a four-week low. One question entering the week is whether tech, which fell more than 2% last week and was the worst-performing SPX sector, can get back on its feet. The tech-heavy Nasdaq (COMP) is still up nearly 31% this year, and valuations for many tech companies have climbed along with prices. This could make gains more challenging without positive catalysts.

Eye on the Fed

As of this morning, the probability that the FOMC will maintain current rates after this week’s meeting is 99%, according to the CME FedWatch Tool. The tool pegs the probability of rates being higher after the November meeting at around 31%.

This week’s meeting includes updates to Fed economic projections and its dot-plot of the policy path ahead. Policy makers are likely to revise economic projections upward “to reflect the recent resilience in the economy,” says Schwab Chief Fixed Income Strategist Kathy Jones.

The spotlight could shine brighter on the Fed’s dot-plot of rate projections after FOMC members predicted in June that rates would finish the current year between 5.5% and 5.75%. That’s a quarter point above current levels, implying one more rate hike in 2023. The Fed has basically taken a hike off the table for this week’s gathering.

Talking technicals: The SPX remains rangebound between support near 4,350 and resistance around 4,600, which roughly approximate the respective summer low and high. The SPX has been forming a wedge pattern over the past six weeks, which can lead to a breakout (either higher or lower), notes Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research, and perhaps this convergence point could coincide with this week’s FOMC meeting.

Market perspective: Want to get a better handle on the state of the U.S. economy? Check the latest insights from Schwab experts Liz Ann Sonders, Jeffrey Kleintop, and Kathy Jones. They discuss the competing narratives that make for an uncertain picture.

CHART OF THE DAY: CHOPPING AROUND. The S&P 500 Index (SPX—candlesticks) has played a game of ping-pong between its 20-day and 50-day moving averages (blue and red lines). Thursday’s rally above the 50-day met selling that took it back below the 20-day. Data source: S&P Dow Jones Indices. Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Outstanding question: The FOMC last pegged end-of-2024 rates at between 4.5% and 4.75%, implying rate cuts from the current level between 5.25% and 5.5%. The market bakes in cuts starting by mid-2024 and 100 basis points of total rate cuts next year, so the question is whether the Fed still sees things that way in Wednesday’s updated dot-plot or if it’s starting to think “higher for longer,” which might delay and/or reduce any potential 2024 rate cuts. This is tough to call, because the last dot-plot showed a wide range of projections from FOMC members for 2024 rates. Remember, the dot-plot isn’t an FOMC prediction—it’s simply a plot of all the FOMC policymakers’ best estimates on where rates might go. A higher-trending dot-plot could take steam out of stocks and start to clip Wall Street’s projections for next year’s earnings growth.

Inflation reawakened? If you’re searching for clues on the chances for an additional rate hike later this year, consider American Airlines’ (AAL) announcement last week that rising fuel prices have begun hurting the company’s profit outlook. Delta (DAL) also said it’s cutting profit estimates as costs rise. Typically, rising fuel costs get captured in the government’s so-called “headline” inflation readings. When the cost of energy starts seeping into “core” inflation—for instance, if airlines decide to raise ticket prices so they can afford pricier fuel—that might make the Fed nervous. Transport companies are more sensitive to energy costs than most sectors. Still, it’s worth monitoring what companies across the spectrum say during earnings season about the impact of rising gas prices. It could provide insight into whether energy costs show up as part of core inflation and perhaps shape the Fed’s response in November and December.

Rough road: Former Ford (F) CEO Mark Fields told CNBC Friday that Detroit automakers are essentially between a rock and a hard place. They can’t plead poverty as they face the United Auto Workers (UAW) union’s wage demands because earnings have sparkled coming out of the pandemic. At the same time, they face competition from Tesla (TSLA) and import automakers that pay their workers lower average hourly wages. Any wage increase would potentially hurt Ford, General Motors (GM) and Stellantis (STLA) from a competitive standpoint. So far, the strike targets only some plants. This could be so the UAW doesn’t cripple the industry and to keep its strike fund from getting depleted too quickly.


Sept. 19: August Housing Starts and Building Permits and expected earnings from AutoZone (AZO).

Sept. 20: FOMC decision and expected earnings from General Mills (GIS), KB Home (KBH), and FedEx (FDX).

Sept. 21: August Existing Home Sales, August Leading Indicators, and expected earnings from Darden Restaurants (DRI).

Sept. 22: No major earnings or economic data.

Sept. 25: No major earnings or economic data.


Key Takeaways

  • Bearish indicators keep flashing as Treasury yields, dollar, and crude oil near recent highs
  • Fed meeting starts tomorrow with investors expecting a rate pause, but tone and projections seen key

  • “Mega-cap” stocks mostly lower in premarket trading after Friday’s weakness, a bearish indicator

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