Overview: Stocks recovered last week after dropping at the start of the week on concerns about stress in the Chinese property sector. After a volatile week, the Hong Kong Hang Seng Index ended 2.9% lower. In the U.S., the S&P 500 Index recovered its losses to end the week 0.5% higher, while international stocks finished down marginally on the week. The major focus for the U.S. markets was the September Federal Reserve meeting, where the Federal Open Market Committee (FOMC) indicated it could start to taper its $120 billion in monthly bond purchases as soon as November 2021. In addition, half of the Fed members indicated expectations to raise interest rates by the end of 2022, sooner than the previously expected 2023 timeline. Interest rates rose after the statement, with the 2-Year and 10-Year Treasury yields ending the week at 0.27% and 1.46%, respectively. This week, the focus will be on politics, as Congress must pass a “Continuing Resolution” by Thursday to avoid a government shutdown. Economic data will be light, highlighted by personal income and outlays reported on Friday. This report will include data on personal consumption expenditures (PCE) which is the preferred measure of inflation used by the Fed. The PCE price index is expected to be reported at 4.2% year-over-year, with the consensus for the core PCE index forecast for a 3.6% annualized increase.

Federal Reserve update: (from JP Morgan) At its September meeting, the FOMC delivered a slightly hawkish message, recognizing slower economic progress due to the COVID-19 Delta variant, but also robust improvement in the labor market and somewhat stickier inflation than it previously assumed. This is reflected in the Fed’s updated Summary of Economic Projections, which shows a downgrade to its growth estimate from 7% to 5.9% for 2021, further upward revisions to its inflation estimates and a reduction in the speed of labor market recovery it expects this year. However, the Fed remains optimistic and expects growth and employment to re-accelerate in 2022. Along with its positive view on the economy, the Committee has also shifted to a more hawkish stance on monetary policy. The median dot plot now suggests the potential for liftoff by the end of 2022 and three rate hikes in both 2023 and 2024. Perhaps most notably, the Fed also gave the first official signal that tapering its bond purchases could “soon be warranted,” suggesting a tapering announcement in November is now very likely. Looking forward to 2022 and beyond, the Committee sees the pace of policy normalization hinging on the speed of labor market recovery, given substantial progress on its inflation goal. Further, while the Fed is preparing to take its foot off the monetary accelerator, the policy will remain accommodative for quite some time. This should continue to support equity markets, but also lead yields to grind higher as economic growth and inflation expectations remain robust.

Weekly Returns and Data

Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s

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