Markets put on the brakes after screaming higher in the pre-market directly after a cooler-than-expected Consumer Price Index (CPI) report for November an hour ahead of the bell. The blue chip Dow index, while closing +105 points, or +0.31%, on the day, had thrust forward more than 800 points in the early session; during the regular trading day it peaked just north of 700 points. The Dow even slipped into negative territory on the day.
The S&P 500, for its part, nearly quadrupled in the early session on favorable CPI numbers, then peaked higher than +2.5% in regular trading; the Nasdaq, on the strength of a positive day overall for tech stocks, gained +114 points, +1.03% on the day. The small-cap Russell 2000 put up an admirable +0.91% for the normal trading session.
It almost feels like market participants checked themselves ahead of the open — and then again as morning trading moved forward — that we still have an official announcement to await from the Fed. Though a 50 basis-point (bps) hike is assumed for tomorrow, it’s not yet occurred, to say nothing of the press conference following from Fed Chair Jay Powell, who we know has the ability to throw a wet blanket onto heated bullishness.
With a large number of analysts see a recession on the horizon, traders see that as a time the Fed is going to have to dial back interest rate levels to accommodate new economic realities. Thus, the idea of the “pivot” continues to be bandied about by some of the more bullish players in the market. But there’s nothing in the Fed’s rhetoric since the monetary decision-making body began hiking rates that would suggest they are looking for a time to loosen the screws they’re currently continuing to tighten.
Let’s assume we’ll be at 4.25-4.50% after tomorrow’s Fed funds rate hike. From here, the dot-plot forward is less clear; we’ll be looking for guidance from the Fed and Powell after the rate hike has been delivered whether another 50 bps hike, then perhaps a 25 bps after that, will be in order. Will the Fed pause there, at 5.00-5.25%, by early May 2023? (There are no Fed meetings scheduled for January or April of next year.)
It’s not an unreasonable assumption from this viewpoint — and from there, a year of hikes having brought us +500 bps from where we started out near zero, waiting to see what’s being affected over time from these interest rate hikes in different areas of the economy. If we do see something break, we might see a change of Fed policy emerge quickly… but is that really something to hope for?
Perhaps a 5% rate for a longer time might be the more moderate remedy to bring down inflation under 4% on things like core CPI year over year (+6.0% was today’s print) without doing major damage to the economy — indeed, perhaps without sliding into a recession at all. If that is indeed what is to transpire in the first half of next year, then we can all put on our rally caps for the second half. But… that’s a lot of “ifs.”
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Markets Pump Brakes Ahead of Fed Funds, Powell
Markets put on the brakes after screaming higher in the pre-market directly after a cooler-than-expected Consumer Price Index (CPI) report for November an hour ahead of the bell. The blue chip Dow index, while closing +105 points, or +0.31%, on the day, had thrust forward more than 800 points in the early session; during the regular trading day it peaked just north of 700 points. The Dow even slipped into negative territory on the day.
The S&P 500, for its part, nearly quadrupled in the early session on favorable CPI numbers, then peaked higher than +2.5% in regular trading; the Nasdaq, on the strength of a positive day overall for tech stocks, gained +114 points, +1.03% on the day. The small-cap Russell 2000 put up an admirable +0.91% for the normal trading session.
It almost feels like market participants checked themselves ahead of the open — and then again as morning trading moved forward — that we still have an official announcement to await from the Fed. Though a 50 basis-point (bps) hike is assumed for tomorrow, it’s not yet occurred, to say nothing of the press conference following from Fed Chair Jay Powell, who we know has the ability to throw a wet blanket onto heated bullishness.
With a large number of analysts see a recession on the horizon, traders see that as a time the Fed is going to have to dial back interest rate levels to accommodate new economic realities. Thus, the idea of the “pivot” continues to be bandied about by some of the more bullish players in the market. But there’s nothing in the Fed’s rhetoric since the monetary decision-making body began hiking rates that would suggest they are looking for a time to loosen the screws they’re currently continuing to tighten.
Let’s assume we’ll be at 4.25-4.50% after tomorrow’s Fed funds rate hike. From here, the dot-plot forward is less clear; we’ll be looking for guidance from the Fed and Powell after the rate hike has been delivered whether another 50 bps hike, then perhaps a 25 bps after that, will be in order. Will the Fed pause there, at 5.00-5.25%, by early May 2023? (There are no Fed meetings scheduled for January or April of next year.)
It’s not an unreasonable assumption from this viewpoint — and from there, a year of hikes having brought us +500 bps from where we started out near zero, waiting to see what’s being affected over time from these interest rate hikes in different areas of the economy. If we do see something break, we might see a change of Fed policy emerge quickly… but is that really something to hope for?
Perhaps a 5% rate for a longer time might be the more moderate remedy to bring down inflation under 4% on things like core CPI year over year (+6.0% was today’s print) without doing major damage to the economy — indeed, perhaps without sliding into a recession at all. If that is indeed what is to transpire in the first half of next year, then we can all put on our rally caps for the second half. But… that’s a lot of “ifs.”
Questions or comments about this article and/or its author? Click here>>