- The Fed’s latest quarterly ‘dot plot’ shows officials expect a reduction in the overall number of cuts in 2024 and 2025, which has led to a shift in market outlook.
- Government bond yields across the US and Europe have surged in the past week on the prospect that borrowing costs would remain at elevated levels for longer than expected.
September has been the worst month of the year for US stocks and government bonds, as investors absorb the Federal Reserve’s signal that a prolonged period of high interest rates is now likely and that it would cut rates much more slowly next year and in 2025 than the market had been pricing in.
The US blue-chip S&P 500 Index was down 4.6% in September (as at close on Thursday), as it headed towards its first quarterly loss in 12 months1.
“The current macroeconomic backdrop means that interest rates are likely to stay higher for longer than investors expect,” says Geir Lode, Head of Global Equities, Federated Hermes Limited, adding that such a scenario – coupled with stickier inflation – could make value stocks more attractive and broaden the market.
Figure 1: A bumpy third quarter
“The expectations of lower inflation combined with a surge in optimism for stocks exposed to Artificial Intelligence have resulted in a small number of large growth stocks fuelling the market,” he says.
“Sustainable stocks have also deflated to a level not seen in five years. Stocks with attractive valuations exposed to sustainability are therefore very attractive in this market,” he adds.
The Fed last week held interest rates at their highest level in 22 years, keeping the federal funds rate at 5.25 to 5.5%. However, the latest quarterly ‘dot plot’ showed officials expect a reduction in the overall number of cuts in 2024 and 2025, which has led to a shift in market expectations2.
As a result, government bond yields across the US and Europe surged in the past week on the expectation that borrowing costs would remain at elevated levels for longer than had been expected.
The yield on the benchmark 10-year US Treasury was 4.6% on 28 September, near its highest level since 2007, while the yield on the 30-year note had jumped to a post-2011 high of 4.7%3.
In Europe, the yield on the 10-year German Bund had risen to 2.8%, also its highest level since 20114.
For further insights on global equities, please see: Global Equity ESG, H1 2023 Report
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1 Bloomberg as at 28 September
2 Federal Reserve hardens commitment to ‘higher for longer’ interest rates | Financial Times (ft.com)
3 Bloomberg as at 28 September
4 Bloomberg as at 28 September
