11/02/2021
This is central bank week. On Wednesday, the Fed is widely expected to announce the start of tapering its bond buying program. The groundwork has long been done to prepare markets for this move in hopes of avoiding any disorderly response. Treasury yields have shifted higher recently, but mostly in response to rising inflationary pressures that cast some doubt on its supposedly transitory nature. At its September meeting, half of the participants projected possibly one interest rate hike by the end of 2022, with the median Fed funds forecast ending the year at 0.3 percent. That forecast also projected core PCE inflation to end 2022 at a rate of 2.3 percent, down from 3.7 percent at the end of this year. Since then, however, investors have brought forward an expectation of at least two quarter-point rate hikes by the end of 2022, as inflation concerns have intensified. The Treasury yield curve has flattened noticeably, falling from 121 basis points at the start of October to 108 currently. During that time, the two-year note has climbed from 0.29 to 0.50 percent, while the ten-year move has been more muted, rising from 1.49 to 1.58 percent.

Last week, it was reported that the September core PCE deflator rose by 3.6 percent year-over-year in September. That pace is certainly well above the Fed’s longer-term target of around 2.0 percent. But September’s pace continued a string of five straight months of relative moderation in the measure’s trajectory. After starting the year at 1.5 percent, core PCE inflation stood at 3.5 percent. That has been followed by four straight months at 3.6 percent. Nevertheless, the stickiness of supply-chain disruption, rising labor costs, and higher prices for energy have swelled the ranks of those becoming increasingly skeptical that inflation will recede as the Fed expects.

Shorter-term bond yields have climbed in global markets as well. The Bank of England also meets this week, and could raise its benchmark rate. The Reserve Bank of Australia also meets against a backdrop of sharply rising yields. And investors in the Eurozone have pushed back against the ECB’s forecast of no rate hikes next year. Last week, the Bank of Canada announced the end of its bond buying program, keeping its benchmark rate unchanged.

Equity Markets Take Economic News in Stride and Hit Another Record High

Equity markets have, so far, taken all of this in stride. In the U.S., the S&P 500® index ended the week at another record high at 4605, as investors have maintained their focus on solid third quarter earnings. And this closing record high came on Friday after Apple and Amazon, together accounting for 10 percent of the S&P 500’s market cap, both sold off following disappointing third quarter earnings. It also came on a day when the employment cost index rose at a record pace in the third quarter, and one day after the advance estimate of third quarter GDP fell well short of even lowered expectations at a pace of just 2.0 percent. The S&P 500 delivered a 6.9 percent gain in October, a welcome turnaround from September’s 4.8 percent decline. Factset reports that with more than half of S&P 500 results having already been reported, third quarter earnings are rising at a projected pace of 37 percent, up 10 percent from what was expected at the end of the quarter. Roughly an additional one-third of the S&P 500 is scheduled to report earnings this week.

Eurozone Equities Enjoy Their Own Resurgence; Investors Await this Week’s Jobs Report

Although not quite at a record high, Eurozone equities have enjoyed their own October resurgence after a difficult September. The EuroStoxx 50 index climbed 1.5 percent in euro terms, leaving it higher for the month by 5.0 percent, after a September drop of 3.5 percent. Last week, the Eurozone reported estimated third quarter growth at an annualized pace of 9.1 percent, dwarfing the experience of the U.S. for dollar-based investors, however, these results have been trimmed by a strengthened dollar. Versus the dollar, the euro has slid from 1.181 at the start of September to 1.156 at the end of last week.

Also on this week’s economic calendar in the U.S. is the October jobs report. It is expected to show a gain of 450,000 new jobs, with the unemployment rate falling to 4.7 percent. How influential this report will be in terms of policy is questionable, however, since on Wednesday the Fed will likely have already tipped its hand.
  
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.

Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources.  This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. 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 specific needs of an individual investor.
Investing involves risk including the risk of loss of principal.

Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.

International investing involves certain risks and volatility due to potential political, economic or currency instabilities and different financial and accounting standards
There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.
 
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years.

The personal consumption expenditure (PCE) measures of the prices that people living in the United States pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Employment Cost Index (ECI) is a quarterly economic series published by the Bureau of Labor Statistics that details the growth of total employee compensation. It tracks movement in the cost of labor, as measured by wages and benefits.

Past performance is not a guarantee of future results.

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.

Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.

Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Ameriprise Financial Services, LLC. Member FINRA and SIPC.