November 30, 2022

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Wall Street ended slightly lower after interest rate report - Standard & Poor's at lowest since 2020

Wall Street ended slightly lower after interest rate report – Standard & Poor’s at lowest since 2020

The S&P index ended at its lowest level in nearly two years. Investors are now eagerly awaiting tomorrow’s inflation numbers, which are the last major numbers before the central bankers meet again next month.

This is what the major indexes looked like when Wall Street closed on Wednesday:

  • The high-density Dow Jones Industrial Average, which is made up of 30 supposedly significant stocks, fell 0.1 percent.
  • The Nasdaq Composite Index, which is dominated by technology companies, fell 0.09 percent.
  • The S&P 500 collective index, which is made up of 500 of the largest listed companies in the United States, fell 0.33 percent.

On Wednesday at 20 Norwegian time, the Federal Reserve presented its interest rate report from its September rate meeting. In the minutes, the central bank wrote that it was surprised by the inflation rate, and indicated that it expects high interest rates to stay in place until prices fall.

The US central bank has raised interest rates from levels close to zero to 3.25 percent so far this year. The market is now pricing in a nearly 100 percent chance of a 0.75 percentage point rise in November, while at the same time it believes the key rate will reach 4.5 percent by the end of the year, which is roughly the same. The level indicated by the Fed members themselves.

The interest rate on US government debt with a maturity of ten years, otherwise known as the ten-year, gave signs of calm after Wednesday’s rate report. The interest rate was almost unchanged with a decrease of 0.04 percent.

The ten-year rate is often referred to as “the most important interest rate in the world” because it is a reference for many interest rates, but also for other financial figures around the world.

“Not this quarter is about”

In its interest rate report, the Fed expects the economy to slow as interest rates rise, but notes that the labor market remains very tight.

A tight labor market is perhaps the Fed’s biggest challenge. Jobs figures for September showed the unemployment rate at 3.5 percent, the lowest in 50 years. Admittedly, the number of job vacancies fell sharply to about ten million in August, but the ratio between unemployment and the number of job vacancies is still very high in a historical context.

Higher price increases give employees good reason to demand higher wages, while a tight job market gives them a powerful bargaining chip when meeting employers. The central bank wants to reduce the number of job vacancies in order to reduce wage pressure and prevent a long-term inflation problem, but historically it has proven difficult to achieve without significantly increasing unemployment.

We think inflation will come down, but we don't necessarily think inflation will fall to the 2 percent inflation target so quickly, says DNB Director Torje Gundersen.

We think inflation will come down, but we don’t necessarily think inflation will fall to the 2 percent inflation target so quickly, says DNB Director Torje Gundersen. (Photo: Michaela Berg)

The labor market seems to be calming down a bit, and wage growth is not as strong as before. But based on experience, we’re not entirely sure that US companies will cut the workforce so quickly, because it’s very difficult to bring people back, says DNB director Torje Gundersen.

All other things being equal, Gundersen points out, this could mean increased margin pressure. With earnings season now in full swing, investors may have some answers.

– I am not interested in the results of the third quarter, but I thought about the directions. It’s not about this quarter, Gundersen says, but next year’s earnings.

– The most important thing now

Price growth in the US was 8.3 percent in August compared to the same month a year earlier, while consensus now expects inflation figures for September to show 8.1 percent. Core inflation is expected at 6.5 percent, up from 6.3 percent in August, according to Trading Economics.

We think inflation will go down, but we don’t necessarily think inflation will come down to the 2 percent inflation target so quickly. And that’s probably the most important thing now – that central banks won’t change their view that interest rates should rise to stave off inflation, says Gundersen.

The benchmark 10-year interest rate is now just under four percent, having risen by a whopping two percentage points so far this year. Increasing interest rates means more expensive loans, lowering the present value of future cash flows, and making risk-free investments in government interest bonds an attractive alternative to stocks.

So far this year, the broad S&P 500 is down about 25 percent, now only slightly higher than it was before the pandemic. However, Gundersen is skeptical.

– The market is starting to price in bad times, but we believe parts of the market in the US haven’t been fully priced into the weakening of the economy, says Gundersen.

When will you start buying shares?

– I do not commit myself, in the words of former European Central Bank President Jean-Claude Trichet. But if the stock falls 15 per cent from here without there are unusual reasons for it, one should be careful not to stay too negative. We don’t believe in any halving from here on out, says Gundersen.

– Get rid of us with stocks

– We are facing a very difficult period. That must be an understatement today, Gundersen says.

Gundersen leads a team that manages approximately NOK 180 billion in DNB’s global tactical asset allocation division. Tactical allocation includes a short-term perspective, as you move towards the asset classes and sectors that you believe will give the best returns in the coming months.

At the beginning of August, DN wrote that the DNB had reduced its quota to the so-called moderate underweight, which was the lowest level since the beginning of the epidemic. In the past two months, exposure to risky assets has decreased even more.

– We’re keen to take more risks than usual. We got rid of stocks in the cyclical sectors, except for energy. We now have a lot of cash, and we’ve started buying some Norwegian bonds. With an effective interest rate of five percent, Gundersen says, it’s a good alternative to stocks now.(Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using links that lead directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.