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Unemployment is at historic lows, and GDP is above expectations, so one would think that markets should be soaring, reaching new highs or at least on track to do so.
However, in the last six months, the markets have returned to where they were six months ago, albeit experiencing ups and downs.
What could be the cause? One crucial factor is the high level of uncertainty.
On the one hand, a stable economy suggests continued growth in corporate profits (don’t forget to follow earnings calendar). But on the other hand, it challenges the Federal Reserve in achieving price stability.
As a result, members of the regulatory agency continue to consider the possibility of another interest rate hike. And it seems that investors are preparing for it as well.
However, the change in investors’ expectations about the future of monetary policy is not only due to the strength of economic data but also to the slowdown in disinflation.
As forecasted, producer prices rose by 0.5% month-on-month in September (compared to the expected 0.3%), partly driven by price increases in the food and energy sectors.
On the other hand, consumer price growth increased by 0.4%, exceeding market expectations of a 0.3% increase. The positive news is that it is down from August.
Once Fed members confirm that the battle against inflation may not be over, bearishness could return to the market, thus it is crucial to follow their speeches.
Still, it is highly unlikely that the regulator will come down hard again, given the unprecedented corporate failures and problems in the commercial real estate sector.
Why? By continuing to raise rates, the Fed could push the economy straight into multiple crises and, ultimately, a recession.
In addition, it is essential to remember that monetary policy decisions have a significant time lag, meaning that recent hikes have yet to impact consumers or businesses fully.
