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The White House announcement that a tentative deal has been reached to avert the first national rail strike in three decades is a huge relief to businesses and investors concerned about new supply chain disruptions.
But it’s not the only potential catalyst for another sell-off in the market, as uncertainty continues to dominate.
What’s Happening: Active investors have had a tough year: More than half of US large-cap equity fund managers underperformed the S&P 500 in the first half of 2022, according to S&P Dow Jones Indices. many more bumps in the road for investors in the coming weeks.
Look here: Shares of FedEx are nearly 20% lower in premarket trading Friday after the company withdrew financial guidance it issued a few months ago and said it would cut costs as demand for packages declined around the world. The company is seen as a gauge of the economy as it understands shipments across a wide range of industries.
1. The US Federal Reserve is meeting next week. Persistent inflation, fears of recession and slowing economic growth have shaken markets around the world. As major central banks implement aggressive rounds of monetary tightening to fight inflation, investors fear they are going too far.
The US Federal Reserve will announce its decision on its next round of rate hikes on Wednesday. Fed Chair Jerome Powell has sent out an aggressive message to investors in light of a very tight labor market and high inflation – indicating that the central bank is likely to raise interest rates by an additional 75 basis points for the third time in a row.
If the Fed remains aggressive at the expense of economic growth, we can expect months of cooling employment data, especially wage data, and widening credit spreads making it more expensive for companies to borrow.
That means higher bond yields, lower stock prices and less chance of a soft landing.
2. Earnings season is coming. Another risk for Wall Street is weaker corporate earnings in October.
About half of all S&P 500 companies cited a “recession” during second-quarter earnings calls, the highest number since 2010. Wall Street’s estimates for the next quarter reflect that gloom.
According to data from FactSet, third-quarter earnings per share estimates are down more than 5.5% since the end of June. That’s the biggest quarterly drop since Q2 2020 (when Covid-19 sent the United States into recession).
Analysts at Charles Schwab predict weaker earnings growth through 2022 compared to last year.
3. War in Ukraine. The markets have been encouraged by Ukraine’s advance, but the outcome of the war is far from certain. That should keep investors wary. Even if the conflict continues to turn in Ukraine’s favour, Europe is unlikely to avoid an invasion-induced recession caused by the energy crisis this winter.
Global flows of goods, including critical supplies of fossil fuels, food and fertilizers, continue to be hampered regardless of which side wins the battle. A new report from S&P Global Ratings estimates that war-related global energy and food shocks will continue through at least 2024. Those shocks will continue to weigh on GDP and fiscal performance.
US mortgage rates are up more than 6% this week, reaching their highest level since the fall of 2008.
High borrowing costs and low inventory levels continue to weigh on Americans seeking affordable housing, reports my colleague Anna Bahney.
Stubbornly high inflation is responsible for driving up rates, noted Freddie Mac chief economist Sam Khater.
Interest rates had fallen in July and early August as fears of a recession emerged. But comments from Federal Reserve Chairman Jerome Powell and recent economic data have turned investors’ attention back to the central bank’s fight against inflation, which has pushed interest rates higher.
There is a silver lining for those who want to buy. As mortgage rates rise and house prices remain high, home sales are slowing. Prices can also fall quickly.
With borrowing costs expected to continue rising in the coming months, it is becoming increasingly clear that house prices need to fall to rebalance housing markets.
“Many sellers are recognizing the shift in market conditions and are responding by lowering their asking prices,” said George Ratiu, economic research manager at Realtor.com. “These changes coincide with the time of year when buyers have historically found the best market conditions to find a bargain.”
Chinese leader Xi Jinping and his Russian counterpart, Vladimir Putin, met on Thursday for the first time since Moscow sent troops to Ukraine earlier this year. Investors followed the meeting closely, looking for clues about the status of their economic relationship.
At the beginning of the meeting, Putin acknowledged that Xi had “questions and concerns” about the invasion. However, their economic partnership did not appear to be in jeopardy, reports my CNN colleague Nectar Gan.
Beijing has pushed bilateral trade to record levels, a boon to Russian business amid Western sanctions. China’s spending on Russian goods rose 60% in August from a year ago. Its shipments to Russia rose 26% to $8 billion in August, reports my colleague Laura He.
During their meeting, Putin highlighted the two countries’ deeper economic ties, noting that bilateral trade exceeded $140 billion last year. “I am confident that we will reach new record levels by the end of the year, and for the foreseeable future,” he said.
Beijing has carefully avoided violating Western sanctions or providing direct military aid to Moscow, but Chinese companies are benefiting from the exodus of Western brands from Russia.
Chinese smartphones accounted for two-thirds of all new sales in Russia between April and June, Reuters reported. According to the Russian analysis firm Autostat, passenger cars from Chinese manufacturers accounted for almost 26% of the Russian market in August, the highest on record.
A first look at the University of Michigan’s consumer confidence survey for September will be released at 10 a.m. ET.
Next week: It’s a blockbuster week for central banks with the Federal Reserve and the Bank of England announcing their latest policy decisions.
Correction: An earlier version of this story incorrectly attributed a quote to sellers recognizing the shift in market conditions. It should have been attributed to George Ratiu, economic research manager at Realtor.com.