Market Watch: September 23 | rdnewsnow.com

On Wednesday, US stocks fell sharply after the Fed, as expected, announced another 75-basis-point hike. The Fed’s decision will bring its benchmark rate to a range of 3 per cent to 3.25 per cent, its highest level since 2008. US stocks traded higher early in the morning, then dropped shortly after the Fed’s announcement. Although they rallied a bit later, indexes fell during the session’s final hour. By Wednesday’s close, the Dow had plummeted 522 points, the S&P 500 dropped 66, and the Nasdaq was off 205 points. In Canada, the TSX declined 184 points on energy sector weakness.

North American stock indexes struggled Thursday as worries over higher rates and a possible US recession weighed on performance. By Thursday’s close, all four major North American indexes recorded modest losses, while 10-year US Treasury yields settled at 3,705 per cent, their biggest one-day gain since June.

NA Indexes Drift Lower

For the four trading days covered in this report, the Dow lost 745 points to close at 30,077; the S&P 500 dropped 115 points to settle at 3,758, while the tech-heavy Nasdaq sank 381 points to close at 11,067. In Canada, the TSX lost 383 points to end at 19,003.

Strategy

The US Federal Reserve (the Fed) implemented its third consecutive 75bps rate hike

The Fed announced on Wednesday that it would raise its target rate by three-quarters of a percentage point to restore price stability. The decision was widely expected by markets and took the Fed Funds rate – up by a cumulative 300bps year-to-date – to 3.25 per cent. Along with the decision pertaining to policy rates, the Fed also released its Summary of Economic Projections and the accompanying dot plot chart. The Federal Open Market Committee (FOMC) projects policy rates rising to 4.4 per cent- 4.6 per cent by the end of this year and next, respectively, before falling to 3.9 per cent in 2024 and settling at a neutral level (a level that is neither accommodative nor restrictive) in the long-run. The updated projections are significantly higher than the June forecast of 3.4 per cent-3.8 per cent for 2022 and 2023, respectively, and 3.4 per cent for 2024.

Further, the committee expects growth to be materially lower this year at 0.2 per cent (1.7 per cent forecast in June), 1.2 per cent in 2023 (1.7 per cent previously), and 1.7 per cent in 2024 (1.9 per cent previously). Unemployment is also forecast to rise to 3.8 per cent this year (3.7 per cent previously forecast), 4.4 per cent in 2023 and 2024 compared to its current level of 3.7 per cent. With these restrictive policy settings, the Fed expects the personal consumption expenditure (PCE) price measure – its preferred gauge for inflation – to average 5.4 per cent this year before gradually falling to 2.8 per cent, 2.3 per cent, and 2.0 per cent over the next three years. Core PCE inflation, which excludes volatile categories such as food and energy, is expected to be 4.5 per cent this year and 3.1 per cent, 2.3 per cent, and 2.1 per cent over the next three years.

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