Jay Powell will probably hammer the dovish hopes, and the latest risk rally when he speaks following the FOMC decision today.
This is, at least, what the latest economic data from the US suggests.
Last Friday, the US core PCE index showed further advance in consumer prices. Though the rise was slower than analyst expectations, the core PCE in the US advanced above 5% in September. That’s twice the Federal Reserve’s (Fed) 2% policy target.
And yesterday’s job openings report showed another 437’000 vacancies in September, pushing the number of total job openings to 10.72 million jobs.
In summary, for now, the US jobs market is not tightening, and the US inflation is not easing. So, there is no reason for the Fed to announce the end of the tightening cycle, in a way to trigger a positive euphoria across stock and bond markets, which would, in return, boost both inflation and jobs in the US.
Maybe Powell could hint that, with today’s 4th consecutive 75bp hike, the Fed could reduce the size of its rate hikes, but he can certainly not promise, when and where, the tightening will pause.
In preparation for an unpleasantly hawkish Fed statement today, the US 3-month yield spiked above the 4.20% mark, the level it was normally supposed to be in 18 months, the 2-year yield returned above the 4.50% mark, the US dollar index advanced and the US equities sold off, and yields jumped.
Nasdaq, the most sensitive of the major US indices slid more than 1% yesterday and could extend losses toward 10200 level if we see another wave of post-Fed selloff, in the continuation of an ABCD pattern building since March.
The S&P500, on the other hand, fell 0.41% yesterday and could fall another 12% toward the 3400 mark, if Powell remained pitiless in his fight against inflation, even if it means further pain for the economy and the financial markets.
The Dow Jones however is poised to do better in tighter market conditions, as the most awaited reflation trade – you remember, where investors leave growth stocks to migrate to value stocks, is finally in play. The big-cap value stocks, that distribute good dividend is finally attracting investors, which explains why the Dow Jones outperformed in October rally, and why it could continue doing better than its major US
Last but not least for the US, the ADP report is due a couple of hours before the Fed decision, and is expected to have eased below 200’000 in October. Any positive surprise will likely further boost the Fed hawks, and dampen the mood in risk assets.
Elsewhere
In China, stocks extend gains on an unverified social media post that China will end its Covid measures. The Chinese foreign ministry spokesman said he was unaware of the plan. Disneyland in Shanghai was shut with people in it, after a Covid case was found in the park… I wouldn’t cry victory just yet!
In Britain, the first day of bond selling from the Bank of England was a success.. The BoE sold £750 million worth of British government bonds from its QE portfolio yesterday, and is planning to sell £40 billion in the next 12 months.
Two weeks ago, no one would’ve bet that the BoE would become the first major central bank to start selling its bonds, without pushing market into turmoil. This means, Rishi Sunak has been doing good, so far.
Tomorrow, the BoE is expected to hike its interest rates by no more than 75bp, on conviction that the Sunak government would opt for some fiscal austerity, and nothing too crazy to wreak havoc, again.
The US dollar gained some field as investors increased exposure to the greenback on expectation of a potentially more hawkish statement from the Fed. The EURUSD is testing the 50-DMA to the downside, and Powell will be the one to decide whether the pair deserves to remain above that level, and extend beyond parity.
