What happened last week
- A more hawkish than expected Fed meeting saw higher interest rate projections in 2024 and beyond.
- The long end of the Treasury yield curve surged to post financial crisis highs after the Fed meeting; negative technicals played a role as well.
- The rates repricing also drove weakness in equity and credit markets.
What we’re watching this week
- Data on the consumer are in focus this week, including spending, income, and sentiment measures.
- One of the Fed’s inflation gauges, PCE1, and inflation readings in Europe and Japan are released this week as well.
- Technical factors, such as investor rebalancing flows, could drive price action as we approach quarter end.
Horizon’s Investment Management Views
- The gravitational pull of the black hole that higher Treasury yields have recently become proved too much for equities last week as the S&P 500 Index notched its biggest weekly decline since the regional banking woes in March. A more hawkish than expected Fed meeting and continued illiquidity and poor technicals in the bond market drove the 10-year Treasury yield to new cycle highs above 4.5%. Other areas of the fixed-income market, including high-yield credit and mortgages, displayed weakness as well. We are closely watching market conditions, especially with a looming government shutdown and other potential negative catalysts like a prolonged UAW strike and the restart of student loan payments, that could temporarily disrupt our more optimistic outlook on markets.
- Broad-based declines across equity and fixed-income markets meant there were few places to hide last week. However, the forward-looking PMI reports and twelve central bank meetings highlighted strong divergences in the growth and policy outlooks across the globe; we expect market volatility to reveal attractive opportunities in the coming weeks. We are holding some lower volatility equity exposure and more liquidity in our fixed-income portfolio as potential funding sources in anticipation of these events.
- This week is the final one of the third quarter – watch out for potential rebalancing flows as investors adjust their portfolios. Last week’s price action was driven in part by investors taking the Fed’s forecast, which pointed to higher for longer rates and essentially no weakness in the labor market, at face value. At this point in the cycle, we believe that focusing on the data is much more important than focusing on Fed communication.
1PCE – Personal Consumption Expenditures, a measure of the spending on goods and services in the United States
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