Wall Street Looks Past Hamas-Israel with the Help of Timid Fed Talk & Turns to Earnings

SPX500 Analysis

The attack of Hamas on Israel sparked a flight to safety, sending oil and gas prices higher. The employment report on Friday revealed the creation 336,000 jobs in September, in the biggest increase since January. The hot report highlighted the tightness in the labor market, supporting the Fed's higher-for-longer stance.

Despite the initial negative reaction, Wall Street looks past both these adverse developments, helped by a dovish tilt in the latest commentary by Fed voters. Although officials maintained the need for sustainably restrictive stance, they appeared conservative around more tightening, worried over rising yields. Ms Logan spoke of potentially "less need to raise the fed funds rate" ^[1], while Ms Jefferson stressed the need to "proceed carefully" ^[2].

Markets were never convinced of a November hike, but chances of such outcome have fallen to just 14.2% according to CME's FedWatch Tool. It also assigns the highest probability to rates dropping to 4.75% by the end of 2024, from current 5.5%. ^[3]

Markets now await tomorrow's minutes of the last policy decision and Thursday's CPI update. Inflation has moderated substantially with progress on the sticky core, but headline increased markedly over the last two months, as energy prices have risen.

Wall Street also looks forward to the new earnings season, which gets underway this week. Delta Air Lines reports on Thursday after a strong summer period, but as i mentioned in the Top 10 Stocks for Q4 guide, rising fuel costs are a "source of concern" for the industry and the Hamas-Israel conflict can intensify the headwinds, with the stocks of major carriers slumping on Monday. Delta has already cut its profit guidance for the soon to be reported quarter, to increased fuel costs. ^[4]

Big Banks follow suit on Friday at a difficult period for the company, despite high interest rates, since the inverted yield curve is generally negative. FXCM's US.Banks basket runs its third straight losing month and so does the Regional Banking ETF (KRE).

SPX500 rebounds from a traditionally losing September as the latest timid Fed speak, help it overcome the strong jobs report and the Middle East conflict. It tries to return above the EMA200 (black line) and regain the initiative. Successful effort will allow it to push towards the 4.450-70 cluster of resistance, but catalyst will be required. However, the Hamas-Israel conflict can continue to create headwinds, while the Fed may need to hike again, given elevated inflation, tight labor market and strong economy. Below the EMA200 immediate bias in on the downside and there is risk for renewed pressure towards 4,171, but a breach does not look easy at this stage.