Last week’s trading session saw the Dow Jones Industrial Average fall almost 400 points on Thursday and Friday combined as U.S. equities investors pointed fingers at rising benchmark Treasury yields.
However, Tom Elliott, International Investment Strategist at deVere Group, cites the core issue can actually be traced back to the Federal Reserve’s monetary policy.
Just a week prior to Treasury yields ticking higher, Fed Chairman Jerome Powell announced that the federal funds rate would be hiked for a third time this year by 25 basis points to its current level of 2.25. With an abundance of data alluding to strong economic activity, Powell announced the rate hike was conducive to the current growth landscape.
“Fed chair, Jay Powell, has repeatedly made clear his nervousness of reading too much into the recent uptick in U.S. wage growth, and the tightening labor market, which are often considered key determinates for inflation,” said Elliott. “Indeed, it is worth noting not only that September’s hourly wage growth, of 2.8 per cent year-on-year, was actually lower than August’s 2.9 per cent, but also that inflation expectations are broadly stable.”
Though they have ticked lower today, benchmark Treasury yields experienced a weeklong ascent the week prior with the 10-year note hitting its current level of 3.218 and the 30-year settling at 3.38 as of 1:00 p.m. ET.
Source: tradingeconomics.com
Meanwhile, the Dow is hoping to avoid a third losing session within the last five days, while the S&P 500 and Nasdaq Composite are coming off three straight losing sessions.
Last week, an outpouring of data from the Labor Department portended to a strong job market with the unemployment rate falling to 3.7 percent, which was one-tenth of a percentage below initial forecasts. Furthermore, the average hourly earnings data showed a 2.8% year-over-year increase, which matched initial expectations, while the average work week came in at a static 34.5 hours.
Related: Why It’s Time to Consider Global Real Estate Stocks
In addition, private payrolls grew stronger than expected in September with 230,000 positions added. The private payrolls total easily bested the 168,000 jobs added in August–more than the 185,000 expected by a survey of economists and the highest number of payrolls added since the 241,000 added in February.
Additionally, the U.S. services sector grew last month at its fastest pace based on data released by the Institute for Supply Management. The ISM non-manufacturing index ticked up to 61.6, which represents its highest level since 2008, beating out a poll of economists expecting the index to show 58 for the month of September.
With all the positive data, it would seem that a rate hike was substantiated and that more are to be expected through the end of 2018 and into 2019, but Elliott begs to differ.
“The risk to stock market investors comes not from a sharp bond market sell-off which raises the risk-free yields on Treasuries,” said Elliott. “It is from the Fed ignoring its chair’s own advice and tightening monetary policy faster than the American economy can stand.
“With three more interest rate hikes expected next year, which would take the Fed’s target range to 2.75 per cent – 3 per cent, there is a growing risk not of inflation derailing the U.S economy, but Fed policy error whereby growth is harmed because of an overly-aggressive policy mix. This would include not only raising interest rates too fast, but also its quantitative tightening program that is withdrawing $50bn a month from the U.S. economy, and so contributing to higher bond yields.”
For more market trends, visit ETFTrends.com