JJ Kinahan is Senior Vice President, Head of Retail Expansion and Alternative Investment Products at Cboe Global Markets, Inc. (Cboe).
Key Takeaways:
- Treasury yields rising again
- Crude oil prices climbing again
- Fed looks to raise hikes, but not this month
We’ve seen this picture before: Markets are falling as the Middle East conflict worsens and continues to curtail oil shipping, fueling inflation fears and driving Treasury yields higher.
In early trading all three major indices were in the red, with the Dow Jones Industrial Average falling 0.21%. The record peaks the Nasdaq Composite and the S&P 500 Index enjoyed earlier this week are getting mostly wiped out, with the Nasdaq down 0.54% and the S&P lower by 0.34%.
WTI Crude Oil prices are up 4.6% to trade in the low $92 per barrel range. The oil markets are rattled by more attacks on tankers in and around the Strait of Hormuz, coupled with President Trump’s threats to strike Iran again before the mid-term elections, according to the New York Times.
The 10-year Treasury yield is tapping 5.29%, once again angling toward its 2002 highs. Interestingly, the bond selloff does not seem to be upsetting the market much as the Cboe® Volatility Index stays below 16, a sign that traders don’t expect a major market shock. To be sure, however, many are waiting to see what becomes of this stock/bond dichotomy: High rates and high stocks are typically a tough combination to keep for a long time.
Potential interest rate hikes are still spooking many investors. The overall sentiment is that they won’t likely be upped at this month’s Oct. 28 Federal Reserve’s Open Market Committee (FOMC) meeting, as measured by CME FedWatch tool. The FedWatch tool is sitting at a 78.4% probability that rates will stay intact this month.
December’s outlook, however, is leaning 68.6% toward an upturn of 25 basis points to a range of 4.0% to 4.25%. Yesterday’s FOMC minutes revealed that most members felt another increase would be needed by the end of the year to help reach the Fed’s 2% inflation target.
Strong economic growth is a major concern among members who believe it will push demand above supply to drive inflation higher. With inflation at 4.2%, Fed Governor Chris Waller said in a speech in Istanbul that he expects more hikes ahead to combat the higher pricing.
“If the economic data continue to come in as expected, I anticipate additional hikes to support a timelier return of inflation to our 2% goal,” he said, according to published reports. “But there is some flexibility about when those hikes will occur. The hikes do not need to come at consecutive meetings, but they should be in place in an acceptable period of time.
Elsewhere, PepsiCo shares are heading 0.42% higher after the snacks and soft drinks giant turned in better-than-expected earnings and revenues. The company has been tackling higher inflation that is impacting its North American market share and pricing strategy, according to analysts.
International sales drove the gains, but apparently won’t be enough to do so again as the company cut its full-year profit outlook, which is now expected to rise 1% to 2%, lower than its earlier guidance of 4% to 6%. In prepared remarks, management said it will cut structural costs to help boost the bottom line, noting that “Our business in North America performed below our expectations and represents a meaningful opportunity for improvement.”
Broadcom shares are 1.6% lower after the Wall Street Journal reported that the chipmaker is looking for $50 billion in financing to develop custom artificial intelligence (AI) chips with OpenAI.
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