First published: 4:23AM EST
Stock indices finished today’s trading session in the green, as the Dow Jones Industrial Average (DJIA), the S&P 500 (SPX), and the Nasdaq 100 (NDX) increased by 0.64%, 0.69%, and 0.77%, respectively. The market is expected to remain choppy this week, amid the Fed’s decision to announce a rate hike.
The healthcare sector (XLV) was the session’s laggard, as it fell by 0.52%. Conversely, the materials sector (XLB) was the session’s leader, with a gain of 1.68%. AutoZone (NYSE: AZO), an automotive parts and accessories provider, announced better-than-expected fiscal Q4 results today. In addition, WTI crude oil gained slightly by 0.2%, reaching $85.42 per barrel.
Furthermore, the U.S. 10-Year Treasury yield increased to 3.492%, an increase of 4.1 basis points. Similarly, the Two-Year Treasury yield also increased, as it hovers around 3.95%. This brings the spread between them to -45.8 basis points. The negative spread indicates that investors still have fears of a recession.
Compared to Friday, the market is pricing in a higher chance of a higher Fed Funds rate for the end of the year. In fact, the market’s expectations for a rate in the range of 3.75% to 4% decreased to 8.4%, which is down from Friday’s expectations of 11.6%. In addition, the market is now also assigning a 45.8% probability to a range of 4.25% to 4.5%. For reference, investors had assigned a 40.7% chance Friday.
The Federal Reserve is expected to kickstart its two-day meeting on Tuesday and reveal the meeting minutes and the interest rate hike decision later in the week. Investors are hooked, as a large number of experts are increasingly expecting a 100 basis-point hike instead of a 75 basis-point hike, which was the expectation before August’s Consumer Price Index was revealed. The market is currently assigning an 18% chance of a 100 basis-point hike.
Home Builder Sentiment Continues to Fall
On Monday, the National Association of Home Builders released its U.S. NAHB Housing Market Index for August. The report measures home builder sentiment by surveying around 900 companies. A reading above 50 indicates that more home builders have a positive view of market conditions than a negative one.
The bad news is that today’s number came in at 46, meaning that most have a negative view of the market. In addition, this print is lower than the 47 that was expected. Indeed, it was a three-point drop from the past month’s reading, which was 49.
The main driver behind this drop in sentiment is higher construction costs related to rising inflation and financing costs. In addition, buyer demand is softening as builders are being forced to reduce prices in order to increase sales and limit cancelations.
This downward trend is likely to continue as the Federal Reserve continues to raise interest rates to combat accelerating inflation.
Prices at the Pump Continue to Decline
Prices at the pump continue to decline, as the national average for regular gas was last $3.677 per gallon, down from yesterday’s reading of $3.678. This is significantly lower than the all-time high of $5.016 per gallon on June 14.
The highest price can be found in California, where prices are substantially higher than the national average at $5.447 per gallon. On the other hand, Texas is the state with the lowest gas price at $3.172 per gallon.
It’s likely that this downward trend will continue going forward as the Federal Reserve looks to raise interest rates to fight inflation. However, higher rates will destroy demand throughout the whole economy. As a result, lower gas prices might have to come at the cost of a recession.
More Economic Data This Week
Meanwhile, August’s new residential construction number is expected to be released on Thursday. That number could give us insights into the situation of the housing market. Notably, the housing market has been showing signs of cooling and is likely in the second stage of the downturn.
Apart from this, last week’s Jobless Benefits Claims Report is also slated to be released on Thursday, giving us a peek into the labor market.
Other News Likely to Influence the Market This Week
On the earnings front, retail giant Costco (NASDAQ:COST) and restaurant chain Darden Restaurants (NYSE:DRI) are scheduled to report their earnings on Thursday. The results of these companies will give us a better view of the consumer behavior trend.
Meanwhile, the strengthening of the U.S. dollar is further accelerating the global recession. The Fed’s upcoming interest rate hike of at least 75 basis points is likely to fuel gains in the dollar, further exacerbating the pressure on global economies.
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