Fed rate hikes. Italian bond movements. Did anyone notice?

There was so much news out of Washington, D.C., the week of Sept. 24 that most markets seemed uninterested in the U.S. Federal Reserve (the Fed)’s actions. On the latest edition of Market Week in Review, Consulting Director Sophie Antal Gilbert and Adam Goff, Managing Director, Investment Practice, discussed the impacts of the latest Fed rate increase, Chinese/U.S. trade wars, and Italian debt.

Fed raises rates and sends calming signals

First the Fed: The expected rate hike did occur. In response the 10-year government bond yield increased to over 3.1% on Sept. 25, before dropping back to around 3.04% on Sept. 28. The reason for the return to calm? First of all, in the statement that came along with the rate rise, there was removal of the language that said the Fed policy was currently “accommodative.” “Every word matters,” said Goff. “And every word is watched very carefully in these statements. The removal of that language, while it sounds bad, it actually calmed the market down.” Goff explained that the statement sent a signal that we’re closer to the end of the rate-rising cycle. Secondly, Fed Chair Jerome Powell stated that he is not expecting any upward surprises in inflation increases, and considers current inflation numbers to be on track.

Debt noise in Italy

Shifting our attention to Italy and the Italian bond market, Goff explained that the ruling parties agreed to allow Italian budget deficits to increase to 2.4% in 2019. Combined with Italy’s already high debt burden, this appears to have struck the market as bad news. Goff said, “The market’s already voted. Stocks went down about 4%, per the Euro STOXX 600® Index. The Italian 10-year bond yield shot up by about 25 basis points.”

Trade war on the march

U.S.-China trade wars also ramped up considerably in recent days, with the U.S. announcement on Sept. 24 of a 10% tariff on an additional $200 billion of Chinese imports. China responded with tariffs of $60 billion on U.S. goods. However, markets responded with more of a yawn than any kind of panic. Goff attributed this to the overwhelming volume of news coming out of Washington, D.C., the week of Sept. 24. He did mention that Russell Investments strategists are keeping a close eye on mid-term elections and potential tariff increases in January, to see if these have greater impact.

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