The recent surge in longer-term Treasury yields has been the biggest story in financial markets these days. On October 3, the 10-year yield jumped 12 basis points (0.12%), its biggest daily gain since the day after the 2016 presidential election, after Federal Reserve Chair Jerome Powell commented on the U.S. economy’s “remarkably positive” outlook. On Friday, the 10-year yield rose to 3.23%, its highest level since May 2011.
Investors endured a flurry of trade headlines and emerging market turmoil in the third quarter, but that didn’t slow down U.S. stocks. The S&P 500 Index rose 7.2% during what has historically been the most volatile quarter of the year (7.7% including dividends), its biggest quarterly gain since the fourth quarter of 2013, its best performance in a third quarter since 2010, and the 11th gain in the past 12 quarters. It is also notable that the S&P 500 did not close up or down 1% on any day during the quarter, only the second time in history that feat has been accomplished during the usually volatile third quarter (1963 was the other time). Here we recap the third quarter and highlight some key factors for markets in the fourth quarter.
The Federal Reserve’s monetary policy meeting will be a focal point for markets this week. The two-day meeting will culminate in a policy decision, new economic projections, and a press conference from Fed Chair Jerome Powell on Wednesday. An interest rate hike is almost a foregone conclusion: Fed funds futures are pricing in a 98% chance of an interest rate increase. Markets will be more focused on implications for policy direction through the end of 2019, as the Fed tries to move toward a neutral policy stance without overtightening.
Will midterm elections drive mayhem in the markets? The upcoming midterm elections promise to be among the more interesting in recent decades. The Republicans can take comfort in elections generally being about “…the economy, stupid!” Unemployment is at multidecade lows and wages are trending higher.
Strong manufacturing growth is a bellwether for overall economic health. Even though manufacturing is a dwindling part of domestic output, accounting for about 12% of gross domestic product (GDP), strong manufacturing growth has consistently preceded significant phases of GDP growth. Because of this, the Institute for Supply Management’s (ISM) U.S. Purchasing Managers’ Index (PMI) survey is one of the gauges we monitor in our Recession Watch Dashboard. Over its past five cycles, the U.S. economy has fallen into a recession an average of 46 months after the ISM index peaked [Figure 1].
Federal Reserve (Fed) Chair Jerome Powell’s speech Friday at the Economic Policy Symposium in Jackson Hole, Wyoming, served as a fitting complement to the minutes from the Fed’s most recent policy meeting. Both Powell’s comments and the minutes reinforced the Fed’s strong case for hiking rates for the third time this year when it meets in September, an outcome the markets are largely expecting [Figure 1].
