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September Living Up to Its Reputation in the Markets

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Monday, September 26, 2022

We kick off a new week of trading riding a four-day market slide, with a new lower open in the cards as of the start to today’s normal session. It’s been a tough September, fitting the reputation the month has historically in the markets, with the Dow -6% so far this month, -6.6% on the S&P 500 and -8% on the Nasdaq. Ahead of the opening bell, the Dow is down another -80 points, and both the S&P and Nasdaq -10.

Following last week’s 75 basis-point (bps) interest rate hike, bringing the bottom range to 3.00% — the highest level we’ve seen since early 2008 (months prior to the massive financial crisis that led to the Great Recession) — we will hear from many Fed presidents, governors and Chair Jay Powell this week, speaking at various functions. On the list we have Boston’s Susan Collins, Atlanta’s Raphael Bostic, Dallas’ Lorie Logan, Cleveland’s Loretta Mester, Chicago’s Charles Evans, San Francisco’s Mary Daly and St Louis’ James Bullard — and this is just through tomorrow.

Fed Chair Powell appears at a talk on digital finance tomorrow, as well. As we’ve seen since at least the Jackson Hole summit, Powell’s tactic to eschew hand-holding for the investor class has already paid off — if by paying off we mean bringing stock market valuations down. Powell does not wish to give any daylight to market doves searching for signs of mercy on monetary policy. And whether they ease up sometime in the near-term or not, the stock market going lower is another way to take some of the air out of inflation.

Thus, it should be interesting to see if all Fed speakers this week will be in lock-step with their Chairman, or whether they might be the ones to let a little light in this week. After a long delay getting into the rate-hike game, the Fed has surely made up a good chunk in Fed funds levels over the past three sessions, with 75 bps per hike. Keeping this throttle to the floor for the final two Fed meetings of 2022 would bring us to 4.50-4.75% on the Fed funds rate by the end of the year, which from this vantage point seems downright draconian.

Still, they could do this — if economic data remains stuck at high levels. Friday of this week brings us the latest Personal Consumption Expenditure (PCE) data for August. Last time around, we were mired at +6.3% year over year PCE on headline, which was one of those stubbornly consistent monthly figures the Fed is trying to drain, even if it was off the recent high +6.8% in June. Worse, core PCE is expected to tick up for the second month in a row, representing the “stickier” aspects of inflation not affected by volatile month-over-month price moves.

However, look for surprises to the downside on this and other economic data from now until November 2nd, when the Fed issues its next monetary policy statement. This goes for employment figures, as well, which we'll see next week, with a new Consumer Price Index (CPI) the week after that. It's unfinished business in the market indices, so paying attention to the metrics is key through this stage.

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