Will they or won’t they?
That was the multibillion-dollar question ricocheting around global trading floors on Monday as investors tried to game whether the Federal Reserve will fire its big bazooka – slashing interest rates – in the months ahead.
From Tokyo to Toronto, the jury was still out, keeping stock prices in an erratic holding pattern to start the week. The rising tide of uncertainty over the Fed’s next policy moves whipsawed sentiment across markets.
On Wall Street, futures tracking the S&P 500 and Dow industrials drifted 0.1% lower in premature New York dealings, signaling more choppy waters could be ahead for the major U.S. equity benchmarks. Just days ago, the S&P 500 hit fresh all-time peaks before enduring a bout of mild profit-taking on Friday.
Across the Pacific, Japanese stocks tumbled 1.2% as the Nikkei 225 retreated from record highs scaled last week. Chinese bourses were also in the red, with the Shanghai Composite slumping 0.7% and Hong Kong’s Hang Seng sliding 0.2%.
But if you think that tells the whole story, think again. Australian shares bucked the regional funk, with the ASX 200 advancing 0.5% in a spirited upswing.
The posture in European bourses out of the gate was similarly discombobulated. The Stoxx 600 continental gauge flitted in and out of positive territory like an indecisive window shopper. Frankfurt’s DAX mustered a 0.1% rise, while Paris’s CAC 40 went nowhere fast. Even the normally staid FTSE 100 in London couldn’t make up its mind, slipping less than 0.1%.
You don’t need to be a seasoned market savant to detect the overarching theme at play. With inflation still running hot and economic growth stalling, traders were transfixed on whether the Federal Reserve will shift to slashing borrowing costs after over a year of aggressive interest rate increases.
Complicating the calculus? Mixed messages from global central banks that are marching to the beat of different policy drums.
While the Fed is nearing the end of its rate-hike regime, others like the Bank of Japan just got the tightening party started. The BOJ pulled the trigger last week on its first rate increase since 2007, finally abandoning its policy of pinning borrowing costs below zero.
That nuanced central bank two-step did a number on foreign exchange markets, with the yen weakening to just above 151 per U.S. dollar. The currency’s accelerating slide prompted some handwringing from Japanese officials about potential intervention to stabilize the yen’s freefall.
For all the cross-asset whiplash and jumbled economic signals, one thing was clear: Market participants were on high alert for even the slightest hint from Fed Chair Jerome Powell and Co. that rate cuts were on the horizon. Any dovish pivot from the central bank could unleash fresh convulsions across global risk assets.
“We’re in a holding pattern until we get more clarity from the Fed on where rates are headed next,” said Doug Rivelli, president of investment advisory Alliant Wealth. “The level of uncertainty has ratcheted up dramatically over the past few weeks.”
Indeed, the violent market swings of late stemmed from competing narratives over whether the Fed’s rate-hiking campaign was still in its final throes – or if more tightening was required to defeat scorching inflation.
Central bank officials have dangled the prospect of up to three quarter-point rate cuts this year, but only if key economic data continues cooling in line with their forecasts.
That has Wall Street strategists falling back on their favorite tradecraft: parsing every syllable uttered by Fed bigwigs like linguistic archaeologists deciphering ancient hieroglyphs.
For market professionals, the wait-and-see approach risked feeling like investment purgatory. With stock indexes bouncing around in a holding pattern, it was getting harder to discern the predominant investing regime.
Was the bull market revival after the pandemic bear rout still intact? Or was this just a headfake before the other shoe dropped? In the absence of clear Fed guidance, no one was quite certain which path lay ahead.
“Central bank communications will be paramount over the next few months,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “From investors’ standpoint, it’s prudent to brace for more turbulence until we get definitive rate signals.”
