On Tuesday, treasuries took a hit as companies flooded the market with billions of dollars in debt sales ahead of this month's critical economic data and the Federal Reserve's rate decision. Stocks fell, and the dollar reached its highest level since March due to concerns about inflation intensified by a rally in oil prices.
Bonds were affected across the U.S. curve, with 10-year yields nearing 4.3 per cent. At least 40 businesses tapped into high-grade markets worldwide on Tuesday following a seasonal slowdown and the recent surge in Treasury rates.
Ian Lyngen, head of U.S. rates strategy at BMO (TSX:BMO) Capital Markets, noted, "Investors are comfortable with the narrative that the bulk of the selling pressure was a function of an atypically heavy corporate issuance calendar as the market returns from vacation season."
The S&P 500 closed below 4,500, small caps index slid about 2 per cent, and homebuilders' gauge plummeted by 5.5 per cent. However, energy and tech shares outperformed.
Fed Governor Christopher Waller stated that given recent data indicating easing inflation, policymakers can afford to "proceed carefully" with tightening. Meanwhile, Fed Bank of Cleveland President Loretta Mester suggested that the central bank might need to raise rates "a bit higher," but refrained from indicating what officials should do at their next meeting.
Goldman Sachs (NYSE:GS) now sees a 15 per cent chance that the U.S. will enter a recession, a decrease from the previous 20 per cent estimate. This shift comes as cooling inflation and a resilient labor market suggest that the Fed may not need to increase interest rates further.
Chris Senyek at Wolfe Research pointed out last week's "bad news is good news" trading action as an indication that the market continues to strongly believe in the "disinflation" and "soft landing" narratives that have driven up stocks over the past six months.
However, Senyek also warned that investors might not be able to maintain this positive momentum. He expects higher-than-anticipated inflation into a persistent price-wage spiral, increased oil prices, housing market strength, and potential rate hikes by the Federal Open Market Committee (FOMC) in November and/or December.
On a more positive note, despite September traditionally being the worst month for U.S. equities, robust market signals suggest it might not be as severe this year. Historical trends show that when the S&P 500 gained between 10 and 20 per cent year-to-date through August, returns have been most robust. If this trend continues, Stephen Suttmeier, chief technical strategist at Bank of America Corp (NYSE:BAC)., predicts that the S&P 500 could rise as high as 4,875 before 2023 ends.
However, Marko Kolanovic of JPMorgan Chase (NYSE:JPM) cautioned investors against getting swept up in an artificial-intelligence induced stock-market rally while Michael Wilson from Morgan Stanley (NYSE:MS) warned U.S. equity investors of potential disappointments due to weaker than expected economic growth this year.
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