Now that the Federal Reserve appears to have abandoned its forward guidance tool in favor of being “data dependent” to help inform its future path for rates, investors should keep an eye on this gauge of inflation expectations for signs of a shift in the market’s mood.
The five-year break-even rate has helped to foretell the direction of stocks all year, and it could very well offer clues as to where stocks might be headed next, the team said. This recent drop, which coincided with falling commodity prices and Treasury yields, appears to have preceded the latest leg higher in stocks. In July, the S&P 500 SPX , Dow Jones Industrial Average DJIA and Nasdaq Composite COMP each cemented their best month in roughly two years, with the Nasdaq surging more than 12%.
In response, economists from Deutsche Bank and analysts at Goldman Sachs have questioned whether investors have become too optimistic about potential rate cuts next year. So far, however, U.S. stocks appear to have shrugged off those concerns.
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