Here’s The What Financial Markets Will Be Watching Out For This September

Historically, September has seen the worst monthly stock market returns in recent history. That together, with the fact that we remain in a bear market with a reasonable chance of a recession means that there is a lot of pessimism around markets currently. However, such pessimism that also sets up some chance of certain data outperforming gloomy expectations as we head into September. Here are the key things to watch and how the market may assess them.

Inflation

This month will see the release of August’s inflation data. For example, we’ll see the CPI release on September 13. In August, energy prices (which were a major driver of July’s low inflation numbers) did not fall quite as steeply as July and natural gas prices have been spiking. However, the markets increasingly believe that the worst of inflation is behind the U.S. economy. We’ll learn more on that this month.

The challenge here is that the Fed may not be quite so convinced, and the Fed Chair used his Jackson Hole speech recently to double down on the risks inflation poses to the economy and how the Fed is committed to fighting it.

Therefore, if indeed inflation is trending down, the question remains as to how fast this will occur and where inflation will level out at. The fact that we are past peak inflation, if that holds, may prove insufficient for the Fed to dial back on hike this year.

The Fed

This brings us to the Fed which will meet to announce interest rates on September 21. Consistent with recent meetings all signs suggest a significant high in rates, and it’s unlikely incoming data before the meeting will change that direction.

The markets and Fed comments are suggesting that we’ll more likely see a 75bps move up in rates, with some chance of a 50bps move. However, the markets do then believe the Fed will start to moderate rate hikes in subsequent meetings. If the Fed pushes back on that, then that could prove a negative for both stocks and bonds.

Housing

There’s a lot of concern in the housing market currently. Early signals imply supply is outpacing demand currently as mortgage costs increase. However, house price data has held up reasonably well so far. September’s news may see pricing starting to soften, though the markets do not have strong expectations for the housing market, so this may not be quite as impactful to the markets as any negative headlines might suggest.

The Yield Curve

The yield curve may continue to invert in September, reinforcing what has been a robust recession indicator historically. What we haven’t seen yet is what many academics view as the clearest recession signal from the yield curve. This is when 3-month rates rise above 10-year yields. That gap is narrowing and may invert in September, which could lead to further negative market sentiment on the likelihood of a U.S. recession.

Employment

However, despite the doom and gloom in many areas of the markets, the U.S. jobs markets has proved robust so far. This is perhaps a double-edged sword as a vibrant jobs market has given the Fed few concerns about hiking rates. Nonetheless, if the jobs market does start to weaken, that may prove a further concern to markets. If it holds up, then it may suggest that even if a feared recession occurs, it could be relatively mild.

So on balance, September may see further bad news concerning the U.S. economy. Though of course with such a weak 2022 already for stocks, the question is how much of this is priced in and when the markets are able to look past the current bad news to find a bottom, based on rosier medium-term prospects. It’s also worth noting that even now, despite weakness in recent weeks, the broader S&P 500 index remain above the mid-June lows of this year.