Forces Of Movement -Sunday, Oct. 14

There are three broad forces of movement in the week ahead: the equity market performance, political developments, and economic data.  

It was a tumultuous week for equities, and there was not clear or obvious trigger. With US bond yields and equities trending higher this year, there does not seem to a reason why it ended last week. Similarly, the recovery before the weekend, which lifted the S&P 500 back above its 200-day moving average, did not appear to have a trigger. 

Instead of beginning a sustained correction in the stock market, last week may have been the climactic finish to a three-week slide that took the MSCI World Index (of developed countries) down 7.25%, and its Emerging Markets Index 9.5%.The Dow Jones Stoxx 600 fell about 6.7%, while the S&P 500 fell 5.5%.Remember most of the benchmark indices were below their 200-day moving averages before last week’s drop. Given that broad economic forces have not changed, and that the S&P 500 closed firm ahead of the weekend, these boost the chances that this was a short-lived hiccup in the markets.  

If this assessment is too optimistic, the next mile marker in the S&P 500 is 2645, which would present a 10% pullback from the highs. Below there are the lows from February’s downdraft around 2530. The equity market decline appeared to fuel the dollar sales last week, and the better performance ahead of the weekend coincided with gains in the greenback. Within the current context, stronger stocks are good for the dollar as it does not prevent the Fed from continuing to gradually hike interest rates. 

The market does not expect the stock market or political pressure to push the Fed off its course. The current average effective Fed funds rate is 2.18%. The implied yield of the December 2019 Fed funds futures has eased five basis points since the end of September from 2.81% to 2.76%. Growth this year is about one percentage point faster than it had anticipated in September 2016, and unemployment is more than 0.5 percentage points lower than it had expected. A December hike would put the fed funds target a quarter point higher than the median Fed officials signaled.