Market Watch: Sept. 24, 2021

U.S. stocks were mixed Tuesday, with minor losses and gains, as investors looked for further signs of fallout from Evergrande Group, while eagerly awaiting news from the Fed on their plans to begin reducing their bond purchases. In Canada, the TSX posted a 90-point gain on strength in the energy sector.

N.A. markets were back in the green Wednesday as fears over Evergrande started to subside, and investors instead turned their attention to Fed officials, who signaled that the central bank could raise interest rates as early as next year – if the recovery continues at its current pace. Energy shares helped drive Wednesday’s gains once again, while financials also rallied on the hopes for higher interest rates. In Toronto, the TSX climbed 157 points as energy stocks surged more than 4 per cent.

U.S. stocks climbed sharply Thursday, securing a second consecutive day of gains as fears around Evergrande’s collapse seemed to diminish, at least for now. By Thursday’s close, the Dow added more than 500 points, while the S&P and Nasdaq rose, 53 and 155 points, respectively. In Canada, the TSX posted a modest 60-point gain.

U.S. Markets Up, Despite Rough Monday; TSX Slightly Off

For the four trading days covered in this report, the Dow added 180 points to close at 34,765, the S&P 500 rose 16 points to settle at 4,449, while the tech-heavy Nasdaq inched up 8 points to close at 15,052. In Canada, the TSX surrendered 28 points to end at 20,462.

Strategy

Higher inflation may call for Fed lift-off next year according to James Bullard, President of the Federal Reserve Bank of St. Louis.

On Wednesday, the Federal Open Markets Committee (FOMC) published economic projections showing 13 of 18 participants expect to begin raising interest rates from their current near-zero levels by the end of 2023. That marked an increase from just seven participants who thought such a timeline for rate hikes would be appropriate back in March, the last time updated projections were published. In the new forecasts, seven participants penciled in a 2022 lift-off, up from four in March. In an interview with CNBC this morning, Mr. Bullard indicated he was among those that felt it would be appropriate to raise rates late next year.

The debate, for both monetary policymakers and market participants, now centres on what is going to happen next year and whether or not the price pressures seen in the last two months persist. Further, the interpretation and application of the Federal Reserve’s new inflation targeting mechanism that allows for periods of corrective overshoots to achieve average inflation of 2 per cent over some time is critical. How each individual Committee members defines “some time” and at what level are they comfortable letting inflation run without action will inform individual, and the overall committee’s actions in the months ahead.

Given the high degree of uncertainty and the dispersion of views, we think it is appropriate to look at Chairman Jerome Powell for direction. Overall, Mr. Powell remains steadfastly of the mindset that price pressures will prove transitory and we interpret many of his comments to suggest that he has a higher bar of tolerance for above target inflation. Wednesday’s meeting and announcements changed very little for us and we think our assumptions for policy actions in the future are still valid.

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Market Watch: Sept. 24, 2021

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