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Stocks traded slightly lower Monday morning, with the S&P 500 steadying just below last week’s record level as traders awaited a Federal Reserve monetary policy decision later this week.
The three major indexes were slightly in the red just after market open. U.S. crude oil prices dipped to trade near $71 per barrel. Treasury yields fell across the long end of the curve, and the benchmark 10-year yield held below 1.5%. Bitcoin prices ticked down to trade below $48,000.
Shares of heavily weighted U.S. equity index component Apple (AAPL) added to gains to set a fresh all-time intraday high. The stock’s market capitalization inched near $3 trillion, and was within 2% of this level as of Friday’s close.
Investors’ focus this week will be on the Federal Reserve’s December policy-setting meeting, which will take place between Tuesday and Wednesday. A new monetary policy statement and press conference with Fed Chair Jerome Powell are due mid-week, alongside the Fed’s updated Summary of Economic Projections charting out individual members’ outlooks for economic conditions and interest rates. Policymakers for other central banks are also set to meet this week, including those from the Bank of England and European Central Bank.
The Fed’s decision has taken on additional significance as the market attempts to predict how policymakers will weigh persistently elevated inflation against the specter of a fresh wave of the coronavirus with the newly discovered Omicron variant. U.S. inflation rose at its fastest pace since 1982 in November, last week’s Consumer Price Index (CPI) showed, pointing to the ongoing mismatch between supply and demand in the recovering economy.
On the virus front, the Omicron variant has so far been detected in 30 states, according to data compiled by the New York Times. Early data so far have suggested the variant is more transmissible than the earlier Delta variant, but may cause less severe disease and be able to be neutralized by a booster dose of the COVID-19 vaccine, according to Pfizer. On Monday, the World Health Organization said the Omicron variant remains a “very high” global risk, while underscoring that data on the severity of the disease is still limited.
But against the backdrop of inflation and a firming economic recovery, the Fed is expected to announce an acceleration of its asset purchase tapering process at the close of this week’s meeting, dialing back one of the central bank’s key tools that had helped support the economy during the pandemic.
“Both equity and fixed-income markets appear to be pricing the coming Fed tightening,” David Kostin, Goldman Sachs chief U.S. equity strategist, wrote in a note.
The firm expects the Fed to double the pace of tapering at this week’s meeting, bringing the Fed’s monthly drawdown of Treasuries and agency mortgage-backed securities purchases to $30 billion per month versus the current rate of $15 billion.
“Historical experience suggest equity valuations are typically flat around the first Fed hike,” Kostin added. “Moreover, some of the longest duration and highest valuation stocks plunged during the past month, suggesting that equity market pricing of Fed tightening is also under way.”
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