01.11.2023 – A mixed October has come to an end. Now the Federal Reserve is back in the spotlight. Most forecasters expect the central bank to pause for now.
In addition to geopolitics, monetary policy has recently weighed on Wall Street: Many investors have given up hope of interest rate cuts in the near future. U.S. small caps slid 7 percent in October, their third straight decline and the biggest loss since September 2022. The Nasdaq fell 2 percent in October, also its third straight decline. Let’s look again at the weekly chart of the Nasdaq 100 – here a preliminary decision seems to have been made in favor of the bears. Lower interest rates could help the bulls in the interest-sensitive high-tech stocks, but they are unlikely to happen.
Source: Bernstein Bank GmbH
Goldman Sachs, for example, sees little chance of interest rate cuts. Chris Hussey, vice president of investment research, just said that there is increased confidence among investors that growth in the U.S. is picking up. Meanwhile, the belief that the Fed will have to cut rates again soon is waning. And if this does happen, it will only be in the coming year and not as strongly as many had hoped. Instead, the interest rate is more likely to remain at 5.25 to 5.50 percent.
Strong economy
Wirtschaftswoche” just referred to the strong growth in the USA. “While economic output in the eurozone contracted by 0.1 percent quarter-on-quarter from July to September, the U.S. economy grew by an annualized 4.9 percent in the same period. In non-annualized terms, as is customary in Europe, this corresponds to a growth rate of around 1.2 percent.” Wiwo also pointed to the 336,000 new jobs in September and the 4.2 percent year-over-year increase in hourly wages recently. In other words, there is definitely room for interest rate hikes when looking at these facts. That’s because the Fed fears a wage-price spiral.
Fear of stalling
But then Wiwo qualified: “However, many central bankers are afraid of overshooting the mark with this.” This is because the M3 money supply has been shrinking for just under a year, with a year-on-year decline of 3.7 percent in August. He added: “A shrinking money supply has often been a leading indicator of recessions in the past.” So higher interest rates could choke off the economy.
The Wall Street Journal concluded that: “The Federal Reserve is likely to leave its benchmark interest rate unchanged this week at a 22-year high while keeping open the possibility of another rate hike to fight inflation.” Another rate hike is possible in December or next year if the economy does not cool down or inflation does not ease as desired, he said.
Our conclusion: The Fed will probably wait to measure the effect of the interest rate steps. This should not necessarily give rise to any great new buying mood. In the event of surprises, volatility is likely to increase. Whether long or short -Bernstein Bank wishes successful trades and investments!
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