Fed's Rate Puzzle: Market Rests as Inflation Fears Subside

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• Markets are pausing after strong gains, with a focus on inflation, oil prices and corporate earnings.
• The Fed's stance on rates and economic data are crucial for gauging market sentiment.
• Disney, Goldman Sachs, and eBay earnings, along with oil price dynamics, are affecting investor confidence.

Interval training is a fitness technique based on intense bursts of activity followed by longer rest periods. In many ways, it mirrors the current state of the financial markets. After a flurry of activity in previous weeks, the market seems to be taking a breather. Yesterday, the S&P 500 inched up by 0.3%, while the Nasdaq Composite posted a more significant gain of 0.9%.

S&P 500

For the year to date, the S&P 500 has recorded a solid 14% gain, with seven consecutive days of positive momentum. In contrast, the Nasdaq, which weathered a turbulent period, has surged by 30% for the year and boasts an impressive streak of eight consecutive days in the green. Both indices have navigated potential headwinds that the earnings season and economic data might have presented, without causing significant disruption.

Inflation has been the buzzword in financial markets all year, with forecasts ranging from potential rate hikes to rate cuts by the Federal Reserve. According to the Chicago Mercantile Exchange (CME), the probability of a rate hike in December hovers just below 10%. The consensus suggests rates will likely remain unchanged until May of the next year, with hopes of a rate cut thereafter. Forecasts can be as unpredictable as Chicago weather, so it's important to approach them with caution. Nevertheless, the prevailing consensus is that rates will remain stable for the near future, a sentiment well-received by the markets.

One factor contributing to the diminishing concerns about inflation is the behavior of oil prices. Late in September, oil prices touched $95 per barrel, with concerns of breaching the $100 mark. However, since then, oil has experienced a notable decline. In premarket trading, crude oil futures are trading significantly below $76.50, marking a nearly 1.5% decrease. This decrease has a ripple effect on gasoline prices, which have fallen by $0.30 since the previous month, as reported by AAA.

Fed

The upcoming schedule includes speeches by Fed Chair Jerome Powell, with little significant economic data in the pipeline. While his message is not expected to change dramatically between today and tomorrow, his insight into the economy's current state, particularly considering last week's weaker-than-expected jobs report, remains of interest. Additionally, three other Fed members are scheduled to speak today, collectively providing insight into their views on interest rates.

Disney

Though the peak of earnings season has passed, Disney (DIS) is set to report its results after the market closes today. As mentioned earlier in the week, Disney's stock has been relatively stagnant for most of the year, making company CEO Bob Iger's comments particularly noteworthy. Disney recently acquired the remaining shares of Hulu and is preparing to launch its new sportsbook, ESPN BET, next week.

Goldman Sachs

In other market developments, Goldman Sachs (GS) has announced its intention to divest its GM credit card program, a move aimed at shedding its retail lending arm after less than two years in operation. Furthermore, eBay (EBAY) reported earnings with a weaker-than-expected outlook for the fourth quarter, leading to a 7.5% drop in its stock during premarket trading.

As for today, futures are relatively flat in premarket trading. Bonds have extended their rally from the previous week, causing interest rates to recede. The yield on the 10-year note stands at 4.56%, a significant drop from its recent peak at 5%. The Chicago Board Options Exchange volatility index, or VIX—a measure of market volatility—has been on a downward trend for seven consecutive days and is now below 15. Observers are keeping an eye on whether the S&P 500 can breach the 4,400 level and if the Nasdaq Composite can surpass 13,700, both potential technical milestones. In these dynamic markets, it's advisable to remain steadfast in your investment strategy and long-term plans.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan 

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