Stocks in the U.S. traded lower coming off the long Labor Day weekend as investors continue to assess the prospects for aggressive Federal Reserve monetary tightening. Expectations for another 0.75% (75 basis point) Fed interest-rate hike in September have spurred the recent decline in stock and bonds. The markets also are contending with an energy crisis in Europe and COVID lockdowns in China. In addition, concerns are growing about the outlook for company earnings as the rebound in stocks since mid-June continues to fade. In commodities, oil is moving lower with a barrel of WTI Crude oil trading around $84 per barrel despite Russia indicating they would halt their energy supplies if price caps were placed on their exports.
The economic calendar is light this week, with investors focused on next week’s CPI report for August. On Tuesday, investors digested the Institute for Supply Management’s (ISM) services sector index reading for August. The index surprised to the upside, improving to 56.9 in August, its best reading since April, amid an increase in business activity and new orders. On Wednesday, the Federal Reserve will release their Beige Book, which could shed some light on the Fed’s current view of the economy and inflation trends. Currently, markets are pricing a Fed Funds peak of 4% by April of next year, followed by a decline to 3% by year-end 2024. While inflation linked to food/energy, auto parts, other goods and cyclical services are rolling over, less cyclical services and housing inflation still are rising. Meanwhile, wage growth still is extremely high, and payrolls and jobless claims have only weakened modestly.
Source: GSAM, CNBC, JPMorgan
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