After the federal government avoided a shutdown, investor sentiment was again driven by the direction of Treasury yields.
Market volatility has increased in the past week, with the S&P 500 having four intraday moves of more than 1 percent. As the market digs the jobs data and the jocking of Fed policy expectations ahead of the latest inflation report continues, will the signs of stabilisation late last week be the start of a short-term rally?
Interest rate hike fears resurface
For the Fed, the job market has become a key factor in achieving a soft landing and inflation goals. On the basis of the latest data, a rebalancing of US Labour demand still looks distant.
U.S. job openings rose to 9.6 million in August from a previous 2-1/2-year low of 8.9 million, reflecting the economy's resilience. Many Fed officials are concerned that a tight labor market could continue to put pressure on wage growth and make it harder to tame inflation. The number of job vacancies for every unemployed person remained at 1.5, up from 1.2 before the pandemic.
The September non-farm report also showed the strong potential of the labor market, with 336,000 jobs added, well above market expectations of 170,000, and job growth in July and August was also revised higher. At the same time, wage growth cooled, with average hourly earnings slowing to 0.2 per cent a month in September from 4.3 per cent to 4.2 per cent a year earlier, likely due to the nature of the industry in which new jobs were created.
Bob Schwartz, senior economist at Oxford Economics, said in an interview with First Financial reporter that seasonal factors or the key to promoting last month's non-farm data. While wage growth has slowed, it is still too fast for the Fed, he said: "Overall, the non-farm report will be supportive but not decisive for further Fed tightening."
Medium - and long-term Treasury yields have continued their upward momentum since September, and investors are also hedging against the risk of potential rate hikes. The yield on the 2-year Treasury, which is closely linked to interest rates, rose to 5.08 per cent, while the benchmark 10-year rose to 4.78 per cent for a fifth straight week, while the yield on the 30-year bond briefly rose to 5.04 per cent, its highest level since 2007.
The Fed remains sharply divided over its next move. Atlanta Fed President Eric Bostic and San Francisco Fed President Bill Daley suggested another rate hike may not be urgent, while Cleveland Fed President Loretta Mester and Fed Governor Jeffrey Bowman said one more rate hike was needed. Pricing in the federal funds rate suggests the probability of a 25-point hike this year has edged up to 50 percent from around 40 percent last week.
Goldman Sachs recently issued a report saying that the Fed will not act this year. The bank sees the labor market continuing to rebalance despite attempts at strong GDP growth, with the July increase in the Fed funds rate the last of the cycle. Goldman reiterated that the Federal Open Market Committee (FOMC) will sit tight in November and December.
Mr Schwartz told China Business that given the tightening in financial conditions since last month's meeting, the Fed would likely continue to opt for caution. "Future data performance remains important and if September core CPI surprises to the upside, it will undoubtedly increase the likelihood of an early Fed move in November, as it suggests that the risks to service sector inflation, supported by the Labour market, remain sticky." 'he said.
The market is expected to rebound
While there was little overall change last week, the day was choppy. At one point in the week, the three major indexes fell to their lowest levels since June, and the Dow gave up all of its gains for the year. The CME Group's Fear index, the VIX, a measure of market volatility, briefly crossed the 20 mark to hit a four-month high.
The move in US Treasury yields dominated the change in risk appetite, keeping the traditional risk-off trading model under pressure. Utilities have been the worst performing sector in the S&P 500 over the past month as rising long-term yields have made defensive strategies significantly less attractive, agency statistics have found. This was followed by the consumer staples sector, which has been one of the havens for money in the past.
But a late-day bottoming out gave the market new hope. Dow Jones market statistics show that compared with the low of the 6th (last Friday), the S&P 500 index closed up 2.1%, the largest intraday reversal since March this year.
From a technical point of view, there is also a short-term demand for index repair after the market overfalls. For the S&P 500, institutions have shifted their target to a gain or loss of 4,200, with Mott Capital Management founder Michael Kramer saying, "The 4,200 mark is critical." Not only is that where the 200-day moving average (DMA) is, but a break below 4,200 also means the S&P 500 is no longer in a bull market. So it's worth considering how many investors might be anxious."
Keith Lerner, chief market strategist at Truist Advisory Services, smells an opportunity because U.S. stocks are at their most oversold levels since the fall of 2022. "The percentage of stocks in the S&P 500 that exceeded their 50-day moving average in the last week was below the 20% oversold threshold, reaching as low as 15%. This means that selling at any cost is often a sign that the market is leaning toward a rebound, although the potential remains dependent on cooling yields and the upcoming earnings season." He wrote in a client note.
In its weekly market outlook, Charles Schwab also mentioned the prospect of a rebound under oversold technical indicators, arguing that the index repair is expected to continue into this week, as a number of market sentiment indicators have gradually turned bullish and historically can be optimistic. On the other hand, Schwab also found that October tends to perform well compared to September, which is historically the worst month for U.S. stocks.