US Interest Rate Expectations Shift Sharply After Fed Official's Remarks

Markets experienced a significant turn as traders adjusted their expectations for US interest rates following comments from New York Federal Reserve President John Williams. Williams stated that there was "no urgent need" for an immediate further interest rate hike, leading to a sharp decline in the probability of an October rate increase from nearly 70% to around 47%. This shift caused long-term Treasury yields to retreat from recent highs, with the two-year yield even moving into negative territory. Wall Street indices also recovered most of their earlier losses.

Despite the immediate market reaction, significant macroeconomic data releases are anticipated today, which could influence the Federal Reserve's interest rate decisions and, consequently, bond yields. The Personal Consumption Expenditures (PCE) price index for August, the Fed's preferred inflation gauge, is expected to show a 0.4% monthly increase, with the core index rising by 0.3%. Annually, PCE is projected at 3.7% to 3.8%, and the core index at 3.4%, still considerably above the Fed's 2% target.

Additionally, the ADP employment report, tracking private sector jobs, is due today ahead of Friday's crucial jobs report. In Asia, stock markets showed mixed performance, with Tokyo and Shanghai rising, while Hong Kong and Seoul declined. Oil prices saw slight gains this morning after falling up to 3.5% yesterday, with Brent crude trading around $103 per barrel and WTI slightly below $90, influenced by reports of recovering Saudi oil exports.

In Israel, dual-listed stocks are expected to open with a positive arbitrage gap of about 0.5% based on Wall Street's performance. Companies like Camtek, Nova, and Tower are anticipated to see gains. Yesterday, the Tel Aviv Stock Exchange closed higher, led by mid-cap stocks, with the TA-35 index showing a minimal increase and the TA-90 index adding 0.7%. Meitav Trade experienced a 3.4% drop following a report of a cyberattack attempt on its trading platform, though no client trading accounts were compromised, personal information was accessed.

Meanwhile, investment bank Morgan Stanley has identified two "red flags" in the US stock market, warning that the S&P 500 could fall between 5% and 10%. Chief Investment Officer Mike Wilson highlighted a decline in market breadth, meaning fewer stocks are participating in the overall market rally. He noted that the percentage of S&P 500 stocks trading above their 200-day moving average has fallen significantly, a level typically seen during market corrections. Wilson suggested that either market breadth will catch up to the index's price, or the index will decline to meet breadth levels, potentially exacerbated by volatility in the bond market.