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Wall Street held its breath on Tuesday morning as investors awaited the start of the pivotal two-day Federal Reserve policy meeting that could determine the direction of interest rates. Stock futures traded unevenly in early market action, with the major indexes poised for a mixed open.

The Dow Jones Industrial Average futures dipped 15 points, or 0.05%, after the index barely inched up 6 points on Monday. S&P 500 futures edged down 0.05% and Nasdaq 100 futures slipped 0.09% in cautious trading. Investors are on edge ahead of the Fed’s announcements on Wednesday, which will likely significantly impact market sentiment.

All eyes are fixed on the U.S. central bank as it is widely expected to deliver another aggressive interest rate hike to combat surging inflation. However, there is intense focus on whether the Fed will signal a potential downshift in the pace of increases going forward. The CME FedWatch tool shows traders are pricing in a 99% probability of a 75 basis point rate hike at this meeting, while the chances of a larger 100 bps hike are seen as extremely slim.

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“The overall market feels a little bit choppier than we’ve seen for the first nine months of this year,” said Ankur Crawford, a portfolio manager at Alger. “China, that was supposed to work and supposed to come out of Covid… the U.S. consumer is showing signs of a little bit more pressure. So we’re heading into choppier markets, and that’s basically just waterfalling into tech.”

Indeed, volatility has escalated in September as investors weigh a host of uncertainties, including persistently high inflation, a strong U.S. dollar, China’s economic woes and recession fears. The S&P 500 fell over 4% for the month as of Monday’s close. Six of the 11 major sectors finished in positive territory on Monday, with energy stocks leading the pack as oil prices climbed. Meanwhile, consumer discretionary shares lagged.

Many market experts argue the Fed needs to maintain an assertive stance on tightening monetary policy to tame inflation running near 40-year highs. However, risks of an economic contraction are rising, with housing and manufacturing data weakening recently. The hope is the Fed will indicate it is approaching the end of its hiking cycle and is ready to slow the pace of increases soon.

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Traders will closely analyze the Fed’s updated Summary of Economic Projections, as well as Chair Jerome Powell’s commentary, for clues on the path forward. The central bank has already implemented 300 basis points of rate increases this year, taking the benchmark federal funds rate to between 3% and 3.25%. Markets are pricing in another 125 basis points of tightening by year-end, which would mark the swiftest pace of hikes since the 1980s.

Aside from the Fed’s rate verdict, Wall Street will also digest a fresh batch of economic data on Tuesday morning. The August housing starts and building permits report showed a slight rebound in home construction from low levels. In corporate earnings, AutoZone beat Wall Street’s estimates for its fiscal fourth quarter results. The auto parts retailer earned $38.51 per share, topping expectations by over 6%, though revenue fell short of projections. AutoZone shares edged up 1.2% in premarket trading.

Looking ahead, all focus remains centered on how hawkish or dovish the Fed sounds in its communications. Stocks have been extremely sensitive to rate hike expectations, with selloffs triggered whenever the Fed strikes a combative tone on inflation. The central bank faces immense pressure to tighten policy sufficiently to cool demand and restore price stability. Investors hope to gain much-needed insight into policymakers’ thinking.

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For continued coverage on how the pivotal Fed decision will likely impact markets, visit [] to read our in-depth analysis and commentary. Stay informed on the key issues facing investors in this climate of heightened volatility and uncertainty.

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