Markets are trending slightly higher as traders and investors await several catalysts later this week, including the U.S. Federal Reserve’s latest decision on interest rates and the October jobs report.
Taken together, the Fed’s rate decision and the latest reading on the U.S. labor market are likely to either send markets higher or push share prices lower. Investors seem cautiously optimistic in the lead-up to these events, with all three major U.S. stock indices up over the past two days. However, that optimism could change quickly if the news from the central bank and jobs report is not what’s expected.
Where Are Interest Rates Headed?
The Fed’s latest interest rate decision is up first on Nov. 1. Markets will be looking for clues as to where interest rates are headed. Specifically, traders, analysts and economists will be looking for signs as to when the Fed may start to lower interest rates. Futures markets currently see the central bank cutting rates starting in June 2024. There’s also currently no expectation of another rate increase this year.
Perhaps more important than the decision on interest rates, though, will be the comments made by Fed Chair Jerome Powell when speaking to the media on Nov. 1. Traders and investors will be reading into every utterance for insight into the central bank’s thinking on inflation and the economy. Any sign of a softening in Powell’s language and stocks are likely to move higher as expectations increase for an interest rate cut sooner rather than later.
How Is the Economy Holding Up?
The wild card in terms of the Fed’s outlook and the future direction of interest rates is the economy. And here’s where things get cloudy. After forecasting a recession for over a year, one hasn’t materialized, much to the surprise of economists. In fact, the U.S. economy has remained resilient despite the Fed lifting its trendsetting federal funds rate at the fastest pace on record to the current level between 5.25% and 5.50%, a 22-year high.
Powell noted the continued strength of the U.S. economy in his last public remarks made earlier in October, stressing that slower economic growth is needed to bring down elevated consumer prices. Inflation in the U.S. is currently at 3.7%, nearly double the central bank’s 2% annualized target.
“Still, the record suggests that a sustainable return to our 2 percent inflation goal is likely to require a period of below-trend growth and some further softening in labor market conditions,” said Powell during a speech to the Economic Club of New York.
A soft jobs report on Nov. 3 could be the best thing for the market, as it would reinforce the view that the Fed is likely done raising interest rates and that a rate cut is on the horizon. However, should the jobs report come in hot and the labor market continue to exhibit strength, it will raise fears that interest rates will remain higher for longer — or worse, that there could be another rate hike on the way. This would almost certainly send equities lower.
What’s Next?
Anticipation is high for both the Nov. 1 Fed rate decision and Nov. 3 jobs print. Combined, they should provide a clearer picture of how the economy is performing and where interest rates are headed as we close out 2023. Good or bad, both events are sure to work as a catalyst on stocks and move markets in the coming days.
On the date of publication, Joel Baglole did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
