Central Banks take a back seat as earnings become the focus

All rather as predicted by the Federal Reserve on Wednesday. After what was described as a dovish statement that accompanied a rate rise from the ECB last week, we got a hawkish Fed accompanying a no change to interest rates this month. As a result of the ongoing underlying relative strength of the US economy, economists continue to push out their expectations for the timing when the Fed does indeed start to cut interest rates. Longer-dated US treasuries sold off, the yield on the 10-year now approaching 4.5%, and stocks along with it. The Federal Reserve painted a picture of a more resilient economy, leading to a slightly stronger employment market than forecast, and as a result, pushing out the expectations for how long inflation and interest rates will stay at current levels.

It was a split decision from the Bank of England to keep rats unchanged this month, 5 in favour of no change and 4 for a 25 basis point rise. Rather as the Fed did the accompanying statement indicated that this may be a pause, not a cessation, as further increases are possible and pushing out the timing when the Bank will ease the monetary brake. There was some good news for the BofE as the annual UK inflation rate fell more than expected to 6.7%.

The market’s focus will now move away from the actions of the central banks and to earnings, as the 3^rd quarter reporting season starts in October. For the first time in a year, a quarter is expected to deliver earnings growth year over year, not by much though. Estimates for earnings in Q3 2023 relative to Q3 2022 are for a 0.2% gain.

What to think about now as we enter the final months of the year, and look to 2024. The year started with forecasts of a US economic recession and the Fed cutting rates possibly twice, before the year’s end to boost the economy. So far there has been no US recession, no indication of any cuts in interest rates, and the markets are now moving to the Fed leaving interest rates where they are for most of 2024. In effect, we will most likely enter 2024 with the polar opposite expectation to the start of 2023, which again is likely to be wrong.

Leading indicators and the restrictive monetary policy indicate the Fed and the markets are too complacent about the possibility of an economic downturn, particularly in the US. The outcome in 2024 will be most likely that the economy will slow further but the Fed will be slow to cut, and markets will react first. At some point, the 1.5 trillion USD that has been deposited into the relative haven of money market funds will find its way back into stocks.