All Eyes on Fed as the S&P 500 Index Remains Volatile

All three major equity indices in the United States traded in the red last week. Investors were spooked by higher-than-expected CPI (consumer price index) inflation data which triggered the possibility of an aggressive monetary tightening policy by the Federal Reserve at their upcoming policy meeting.

In the week ended on September 16, the S&P 500 fell 4.8%, while the Dow Jones Industrial Average and Nasdaq declined by 4% and 5.5%, respectively. Comparatively, the 10-year Treasury yield closed at 3.45%, its highest level since June, while the two-year yield rose to 3.87%, the highest level since 2007.

The yield curve inversion between the 10-year yield and the two-year yield has widened. The inverted yield curve is considered a recession indicator, and the Fed might trade an economic slowdown to offset rising inflation.

Further, the price of West Texas Intermediate crude traded at $85 per barrel and was under pressure as a global recession is bound to impact energy demand.

As we come to the end of Q3, the S&P 500 index is trading close to bear market territory and is down 19.3% from all-time highs. The Nasdaq and Dow indices have fallen 28% and 16% from record highs, respectively.

Let’s see what events in the upcoming week will drive the equity markets.

 

Policy meeting of key central banks

The U.S. Federal Reserve will begin its two-day policy meeting on Tuesday. It is likely to hike interest rates and subsequently hold a press conference on Wednesday. Most economists forecast the Fed to hike interest rates by 75 basis points, while a few are anticipating a 100 basis point hike. Since March, the central bank has raised the benchmark funds rate by 225 basis points to combat higher commodity prices as inflation soared to 40-year highs.

Other central banks, such as the United Kingdom and Japan, are also scheduled to hold policy meetings this week. The Bank of England or BoE is on track to increase benchmark rates on Thursday as inflation is the highest among G-7 countries. In August, the BoE hiked rates by 50 basis points, which was the largest increase since 1995. The benchmark rate in England is around 1.75%.

However, Japan’s central bank is holding interest rates at record lows as inflation remains at manageable levels for the export-oriented economy. There is a chance for Japan to even undertake quantitative easing measures if required.

 

Housing market under pressure

The U.S. Census Bureau will publish data on August housing starts and building permits on Tuesday. It will basically track the construction of new housing units for the last month. Housing starts are forecast to fall to 1.44 million units in August, compared to 1.446 million units in July, due to higher rising materials costs.

Additionally, rising interest rates have also impacted demand as consumer savings are under pressure. Building permits are expected to decline to 1.61 million in August from 1.685 million in July.

The National Association of Realtors (NAR) will provide an update on existing home sales in August on Wednesday. Analysts project existing home sales to fall to 4.7 million units in August, compared to 4.81 million in July.

These numbers have now fallen for six consecutive months after touching a peak of 6.49 million in January.

According to Investopedia, “Freddie Mac reported this week that the average rate on a 30-year fixed-year mortgage rose above 6% for the first time since 2008, putting further pressure on potential homebuyers.”