The U.S. financial markets faced uncertainty on Friday, as the Federal Reserve signaled a prolonged period of elevated interest rates and fears of a potential government shutdown loomed. This combination led to a lackluster performance in Friday's early futures session, following a week of significant downturns for major stock indices.
Despite minor upticks in the Dow Jones, S&P 500, and Nasdaq Futures on Friday, the week saw the S&P 500 and Nasdaq Composite decline by 2.7% and 3.5% respectively. These declines marked their worst weekly performance since March. The turbulence was echoed in the bond market, where the 10-year Treasury yield rose by 15 basis points to reach a high not seen since 2007 at 4.498%. The 2-year rate also soared to a level last seen in 2006, at 5.2%.
In its recent policy meeting, the Federal Reserve held interest rates steady but indicated an additional rate hike within the year, reducing the chances of rate cuts in the next year. Despite some signs of easing inflationary pressure, inflation remains a concern for Federal Reserve Chairman Jerome Powell.
Adding to market unease is the potential for a U.S. government shutdown following House Republican leaders' adjournment of the chamber without passing a crucial funding bill. A government shutdown could impact Q4 GDP figures and further complicate Federal Reserve decision-making by limiting access to key economic data.
In contrast to this uncertainty, weekly jobless claims fell unexpectedly to 201,000, leading some traders to anticipate further rate increases to cool the economy.
Internationally, despite a slowdown in private sector growth and an inflation rate exceeding its target for 17 consecutive months, the Bank of Japan held its benchmark lending rate steady at -0.1%.
Investor sentiment appears to be declining, with a survey from the American Association of Individual Investors indicating a four-month low in bullish outlook for stock performance over the next six months. Given the Federal Reserve's stance, looming government shutdown, and declining investor optimism, the short-term market outlook appears bearish. As multiple pressures converge, further downward movement may be expected in the markets as September progresses, reflecting the historical volatility associated with this period.
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