An Investment Path Strewn With Banana Peels
Three prominent risks could cause markets to trip in the coming days: the Federal Reserve’s monetary policy announcement, the United Auto Workers (UAW) strike, and the federal budget impasse.
Let’s start with the Federal Reserve. The economic calendar this week is relatively light, which makes Fed policy especially dominant in the news. All eyes are on the unelected bureaucrats who toil in the Marriner S. Eccles Federal Reserve Board Building in Washington, DC.
The betting is that the Fed will pause its interest rate tightening at the end of the Federal Open Market Committee (FOMC) meeting Wednesday, but perhaps hike again at its December FOMC meeting. Investors are in wait-and-see mode.
Global equities seem to be in a holding pattern as well. European inflation remains a concern and China’s economy continues to sputter. Crude oil has become a more prominent part of the investment narrative, with prices hovering above $90 per barrel and apparently on their way to the $100/bbl threshold.
The surge in crude oil prices is good news for the coffers of OPEC+ and for energy investors, but bad news for inflation fighters. Higher energy costs make the Fed’s job tougher.
In addition to the Fed’s actual decision, investors will of course parse every word uttered by Fed Chief Jerome Powell. Whether Powell proves aggressively hawkish in his remarks and tanks the markets is always a source of suspense.
U.S. stocks barely moved Monday. On Tuesday, the main U.S. indices closed lower, as follows:
- DJIA: -0.31%
- S&P 500: -0.22%
- NASDAQ: -0.23%
- Russell 2000: -0.42%
The Fed also will provide economic forecasts on Wednesday. The good news is, moderating jobs growth gives the Fed a justification for standing pat on rates. However, as he has in recent press conferences, Powell probably will leave the door open to further hikes.
It’s also a good omen that Treasury yields have barely budged lately, with the 10-year benchmark rate sitting at around 4.36%. A move above the 4.50% level would represent a bearish sign, but for now, the bond market seems to concur that the Fed tightening cycle is nearing an end.
As of this writing, the CME Group’s FedWatch tool puts the chances of a rate pause at a whopping 99% (see chart).
Source: CME Group
Looming as threats to the economy, and thereby making a Fed pause more likely, are the autoworker strike in Detroit and the budget wrangling in Washington.
UAW negotiations with the “Big Three” automakers continue with no deal in sight, which could create a drag on U.S. gross domestic product. Among its demands, the UAW wants an agreement that extends to all factories, even those in the South and Southwest that make electric vehicles (EVs).
The future of “green” energy is at stake, because EV manufacturing requires fewer workers, which poses a threat to workers who make conventional, more labor-intensive gasoline powered vehicles.
(Groucho) Marxism Comes to Washington…
Meanwhile, the implacable ultra-conservative faction in the GOP-controlled U.S. House seems hellbent on shutting down the government, which would be disastrous for the financial markets and economy.
Hardliners in the House are insisting on draconian budget cuts that have zero chance of passing the Democratic-run Senate. The intra-party feud within the GOP has gotten so fierce, House Speaker Kevin McCarthy (R-CA) is in danger of getting ousted from his post by the far-right.
On Tuesday, reports surfaced that a draft resolution to remove McCarthy was found discarded in a baby changing station in a bathroom under the House floor. The motion had been drafted by McCarthy’s nemesis, Rep. Matt Gaetz (R-FL). It remains a mystery as to who left the resolution in the bathroom, and whether the culprit did it on purpose or not.
Washington has become a screwball comedy. Except it’s not funny.
Congressional ineptitude continues to plumb new depths. Rancor and mistrust have reached epic levels. Negotiators routinely renege on promises. Integrity is out the window.
As Groucho Marx once said: “Those are my principles, and if you don’t like them… well, I have others.”
When brinkmanship occurs in Congress, a face-saving resolution is usually reached. However, in recent years, the art of legislating has been replaced by political theater. Some politicians don’t want solutions; they want to burn down the house.
Lawmakers are approaching a September 30 deadline to reach an agreement to keep the federal government funded or else risk a shutdown. If the government shuts down, the stock market is likely to plunge. Brace yourself.
And if you’re nervous about all the uncertainty I’ve just described, consider the advice of my colleague, Robert Rapier.
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John Persinos is the editorial director of Investing Daily.