"All of that said, it's really hard to be in a market place where good news on the economic data is bad and bad data is bad as well, and the only thing we can lean against is an improvement in readings on inflation. "The 2-year is really an expression of what we think the terminal rate is, and that's why it's moving up so aggressively," he said. Hogan said the stock market has been "freaking out over every tick higher in the 2-year yield," which rose above 3.9% Friday. "The potential shock that we could see on Wednesday could be in the dot plot, not in the size of the rate hike." The market is also pricing in a slight chance of a 100 basis point hike, but most economists expect a third 75 basis point increase instead. "It's now effectively an upper bound of 4.50%," said Ben Jeffery, fixed income strategist at BMO. It had been pricing in a 4% terminal rate by April. After the CPI release, the futures market for fed funds priced a big jump higher in the terminal rate, or end point where the Fed stops hiking. Strategists say the most important information investors are looking for from the Federal Reserve will be what's on the dot plot, the Fed's so-called interest rate forecast. Maybe we'll flip the switch on that if you see enough of a drawdown in the housing data." He said that would mean the Fed's rate hikes are slowing the economy, as intended. "Good economic data has been bad for the market, but we haven't seen bad economic data be good for markets. "The problem with that is it's a 'heads I win, tails you lose,'" said Art Hogan, chief investment strategist at National Securities. August housing starts are Tuesday and existing home sales are Wednesday, and the data is expected to show slowing as mortgage rates rose. Now it's not." Fed ahead In the week ahead, there are just a few data releases, but they will provide an important window into how the housing market has been coping with the Fed's rate hiking cycle. "The bond market had been competing for capital with both hands tied behind its back. "When you can get 4% yield in the front end of the yield curve that's an attractive alternative," said Jack Ablin, chief investment officer at Cresset Capital. That accelerated the wild ride higher in shorter duration Treasury yields, which pulled funds to fixed income investments as investors jumped on yield levels not seen since 2007. After the CPI, markets shifted to price in an even more aggressive Fed rate hiking path. A multi-day rally came to an abrupt halt, and the Dow lost 1,276 points, or almost 4%, in the worst stock market day since June, 2020. The stock market's tone soured dramatically after Tuesday's release of the consumer price index, which showed inflation to be hotter and more pervasive than expected in August.
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Stocks were sharply lower on the week, with the S & P 500 ending at 3,873, a decline of 4.8% and its worst week since June.
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HOW TO PLOT FED IN PYROSIM FULL
FedEx rattled the market after it withdrew its full year earnings guidance Thursday, warning about global softness in its delivery business. The central bank's two-day meeting Tuesday and Wednesday comes in a week where investors will also be on high alert for more guidance about corporate earnings ahead of the next reporting season in October.
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The Federal Reserve is expected to raise interest rates by another three-quarters of a point Wednesday, but it is what it signals about future rate hikes that will drive markets.