U.S. equities limped to the finish line of the third quarter, as the S&P 500 index slipped 0.5 percent last week, unable to overcome ongoing trade jitters, another Fed rate hike, and political drama in Washington and at the U.N. It was, nevertheless, the best quarter for the stocks since the end of 2013, as the S&P 500 climbed 7.2 percent. Investors have clearly put aside the issue of trade uncertainty until there is further tangible evidence of its impact, and focus on the ongoing strength of the economy in the meantime.

The preliminary outcome of trade tensions may show up as soon as third quarter earnings season, as management teams discuss the impact on their operations as well as their future strategy. But the quarter ended with some encouraging news on trade, as Canada agreed to join with Mexico in signing onto a replacement for the North American Free Trade Agreement (NAFTA) late on Sunday, with equity futures pointing to a sharply higher open on Monday in response. The agreement must still be approved by Congress, with a vote not expected until after the first of the year, raising another bit of uncertainty surrounding the outcome and impact of the midterm election.

With the new North American trade deal, and negotiations between the U.S. and the European Union (EU) seemingly in abeyance, the focus is now exclusively on China, and that dispute seems no closer to resolution. Over the weekend, China reported a further weakening of its manufacturing sector as export orders suffered, although it did remain modestly in expansion mode.

What’s the Fed’s Next Move?

As expected, the Federal Reserve raised the overnight rate once again last week. It was the third such rate hike this year and expectations of a fourth hike in December have now risen to 80.5 percent according to the CME FedWatch tool. The rate hike brings the effective Fed funds rate to 2.17 percent, above the 2.0 percent year-over-year increase in the core Personal Consumption Expenditure (PCE) deflator in August. This is the first time that the real, or inflation-adjusted, Fed funds rate has been positive since 2008, a significant milestone on the path to policy normalization. The Fed also dropped the language characterizing policy as “accommodative,” although it can hardly be considered restrictive.

Treasury yields fell slightly following the Fed’s decision. Having ended the previous week at a yield of 3.06 percent, the ten-year note yield rose to 3.10 percent just prior to the announcement only to fall back to 3.06 percent, where it closed. However, that yield is rising once again this week in early trading on the news of the trade deal with Canada.

The Government Increases Year-Over-Year Spending

The end of the third quarter also brings a close to the federal government’s fiscal year. According to the Congressional Budget Office, the red ink in Washington through August totaled $895 billion, $222 billion, or one-third larger than last year’s eleven-month total. Excluding the effects of the timing of certain payments, the eleven-month deficit was still $154 billion, or 23 percent, above last year’s pace. Spending for Social Security has risen by five percent so far compared to fiscal 2017, with Medicare and Medicaid spending climbing four percent. Defense spending rose six percent, while spending for debt service jumped 19 percent. Overall, revenue has increased one percent, while timing-adjusted spending increased 4.7 percent.

The September jobs report headlines this week’s economic calendar, with the Bloomberg consensus anticipating the creation of 182,000 new non-farm jobs and the unemployment rate dropping to 3.8 percent. Of course, the average hourly earnings rate will be the focus of investors and the Fed alike, as both attempt to navigate the uncertainty surrounding the true non-accelerating inflation rate of unemployment.

Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.

Past performance is not a guarantee of future results.

The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The CME FedWatch Tool analyzes the probability of FOMC rate moves for upcoming meetings. Using 30-Day Fed Fund futures pricing data, which have long been relied upon to express the market’s views on the likelihood of changes in U.S. monetary policy, the tool visualizes both current and historical probabilities of various FOMC rate change outcomes for a given meeting date. The tool also shows the Fed’s “Dot Plot,” which reflects FOMC members’ expectations for the Fed target rate over time. 
The information and opinions in this article are compiled from third party sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individual investor.

Indexes are unmanaged and are not available for direct investment.

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