Equities Hold Steady as Fed Rate Cut Jitters Persist

Wall Street traded in a narrow range on Monday, with major indexes posting modest gains despite last week's Federal Reserve rate cut. Investors remain cautious, seeking catalysts for further market movement as the quarter draws to a close.

While the Fed's recent dovish stance has fueled optimism about lower inflation, the 10-year Treasury note yield climbed again today, indicating tightening real-economy conditions. This suggests that markets may be growing concerned about the potential for lower rates to trigger inflation.

The benchmark S&P 500 index closed at a new record high, albeit only slightly above last week's record, with eight out of 11 sectors finishing in the green. Consumer discretionary stocks led the way, fueled by a renewed sense of consumer confidence and a pullback in inflation and borrowing costs.

However, valuations remain a concern, with the forward SPX price-to-earnings (P/E) ratio sitting near 21. This could cap further upside potential for equities, particularly if investor sentiment shifts towards a more risk-averse stance.

Bond market volatility, which had eased significantly last week following the rate cut, has begun to creep back up. This is reflected in the continued steepening of the yield curve, with yields on long-term Treasuries outpacing those on short-term securities.

The week ahead is packed with Fed speeches, with a particular focus on the upcoming remarks from Governor Michelle Bowman, who was the sole dissenter against the 50-basis-point rate cut. Her comments will provide valuable insights into the Fed's internal debate about inflation and job growth.

Additionally, this week's economic calendar features key inflation data, including the August Personal Consumption Expenditures (PCE) price report on Friday, the Fed's preferred inflation gauge. A benign PCE report could further quell market volatility, though geopolitics and the looming government shutdown deadline remain potential sources of uncertainty.