The rapidly accumulating US debt and hawkish Fed interest rate paths paint a concerning picture for markets. With the government adding over $17 billion per day to the debt since crossing $33 trillion, fiscal policymaking appears ineffective at reining in unsustainable deficits. Meanwhile, the Fed's hawkish stance has driven Treasury yields to fresh multi-year highs, tightening financial conditions. This backdrop of surging debt, higher borrowing costs, and partisan brinkmanship raises the spectre of a potential downgrade that could roil markets. Though a government shutdown may only briefly dent growth, recurring fiscal crises erode confidence and increase uncertainty. Markets seem primed for volatility as economic headwinds strengthen and policy responses falter.
Major indexes started the week strong, led by Amazon and energy stocks, though yields continued to rise. This week brings fresh economic data, including GDP and inflation numbers, as well as speeches by the Fed chair that will give clearer views. Issues like the pending government shutdown also loom over markets, though stocks tried to shake off recent losses and end the quarter on firmer footing amid higher volatility.
Gold prices edged lower on a stronger U.S. dollar and rising Treasury yields, which reduced the appeal of non-interest-bearing assets like gold. The dollar strengthened and yields rose after the Fed reiterated its commitment to tighter monetary policy to combat inflation. Technically, the price is going into consolidation, suggesting that the market is still digesting interest rate expectations for November.
Oil prices fell on renewed concerns over China's economy, which dented sentiment. Major brokerages downgraded their Chinese economic growth forecasts for 2023, though supply is still expected to be tight with OPEC+ cuts in place. Crude prices remained flat to negative on Monday as a strong dollar and lack of positive catalysts countered the bullish impact of Russia's export ban tweaks.
The US dollar hit a 10-month high as the Fed expected to sustain high rates, while the euro and pound fell sharply versus the dollar. The Japanese yen stayed near an 11-month low against the dollar, although the government warned of currency intervention as the BOJ reaffirmed its dovish stance, while the Chinese yuan lingered near 10-month lows amid ongoing China property sector concerns.