Prior Week Summary
The S&P 500 fell 0.34% on the week, posting its third consecutive weekly decline as recession fears took center stage, clouding the outlook and rattling equity markets. Investor sentiment turned sour early in the week when the ISM Manufacturing Index fell far below expectations, posting a level of 47.8 which suggests the manufacturing sector is contracting. The manufacturing slowdown has appeared to spill over into the services sector as the ISM Non-Manufacturing Index also fell below expectations to 52.6, the lowest reading in three years. Friday’s non-farm payroll report indicated that the U.S. economy added 136,000 jobs in September. While the jobs figure missed expectations, the unemployment rate dropped to 3.5%, the lowest level in nearly 50 years, and August hiring figures were revised upward. The Fed Funds futures market is pricing in just over a 70% chance for a rate cut at this month’s FOMC meeting, significantly higher than the 40% chance implied at the start of the week. Speaking at a “Fed Listens” event in Washington, Federal Reserve Chairman, Jerome Powell, downplayed recession fears saying, “I would not see a recession as the most likely outcome for the United States or the global economy,” and noting, “Unemployment is near a half-century low, and inflation is running close to, but a bit below, our 2% objective.”
On the trade front, the U.S. announced it will levy 10-25% tariffs on $7.5 billion of European Union (E.U.) goods, starting October 18th, after the World Trade Organization (WTO) ruled E.U. subsidies given to Airbus SE were illegal. In Washington, the political turmoil continued as the impeachment inquiry moved ahead and a second whistleblower came forward.
The Look Forward
Market participants will be awaiting updated figures on wholesale inventories, the Producer Price Index, and the Consumer Price Index in a relatively quiet week for economic releases. U.S. and Chinese officials are set to hold talks on October 10th and 11th, but hopes of a broad agreement are fading after Bloomberg News reported on Sunday that China is looking to limit the scope of a potential agreement and will not make “commitments on reforming Chinese industrial policy” or “government subsidies.” FOMC minutes from the September meeting are released on Wednesday, and a host of Federal Reserve officials are scheduled to speak throughout the week.
Market Implied Policy Path (Overnight Indexed Swap Rates)
Fixed Income Snapshot
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