Fed’s Dovish Tone Sparks Stock And Bond Market Fluctuations

U.S. stocks closed mixed on Friday, September 22nd, 2023, with the DOW and S&P experiencing losses and the Nasdaq 100 edging slightly higher. This followed a day that initially appeared positive due to dip buying and short covering.

Although an initial rise in bond yields provided early support to stocks, it failed to sustain price gains.

The past week revolved around the Federal Reserve, and on Wednesday, it delivered an outcome widely anticipated by keeping interest rates unchanged.

However, what was unexpected was the dovish tone struck by Fed Chairman Powell and the change in the dot plot.

During the post-decision conference, Powell stated that a soft landing was not a baseline expectation, which eroded investor confidence.

He also emphasized that economic activity had surpassed all expectations. Notably, the revised dot plot now suggests that one more rate hike in 2023 and a mere 50 basis points  cut in 2024.

This sent bond yield soaring to levels last witnessed in 2006. The 10-year yield breached the 4.50% mark but ended the week lower at 4.434%.

For the week, the S&P saw a substantial 2.9% drop, marking its most significant decline since mid-March. The Dow Jones average slipped by 1.9%, and the Nasdaq Composite closed 3.6% lower.

Here are the closing levels on Friday, September 22nd, 2023:

Last Change %Change
DOW JONES  33963.84 -106.58 -0.31%
S&P 500 4320.06 -9.94 -0.23%
NASDAQ 13211.81 -12.18 -0.09%
U.S. 10Y 4.434%
VIX 17.2 -0.34 -1.94%

Two Federal Reserve officials voiced the possibility of at least one more rate hike and suggested that borrowing costs might need to remain elevated for an extended period to help the central bank tackle inflation and bring it back to its 2% target.

While Boston Fed President Susan Collins said further tightening “is certainly not off the table,” Governor Michelle Bowman indicated that more than one increase might be necessary.

This development is not entirely surprising. Fed officials have been advocating for a prolonged period of higher interest rates throughout the year. However, the market had been reluctant to accept this narrative, with many investors expecting a pivot as early as September.

Now, as we near the end of September, we have yet to see this shift.

The price action in the market suggests that it’s beginning to recalibrate and potentially brace for the adverse effects of an extended period of higher rates.

From a technical perspective, the outlook is growing more bearish as both the S&P and Nasdaq closed below their 100-day moving averages.

There are still skeptics who may view this selloff as temporary. However, as mentioned last week, it is advisable for them to hedge their downside risk.

Source: CBOE, Bloomberg

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years.

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