Fed’s Waller and Bowman Spark Intraday Market Chaos

Stocks were up just barely in early afternoon trading as investors cautiously watched for an end to the massive November rally. The Dow Jones Industrial Average edged up by approximately 0.4%, while both the S&P 500 and the Nasdaq Composite saw a rise of about 0.2%, following a somewhat subdued start to the week.

As November draws to a close, the market is contemplating the possibility of a pullback after a significant surge that positioned stocks for their best monthly performance in over a year.

This bullish sentiment is partly driven by the belief that the Federal Reserve may have reached the end of its interest rate hikes. However, contrasting views from Fed Governors Michelle Bowman and Christopher Waller, expressed in two separate speeches today, highlight differing perspectives within the central bank regarding the future trajectory of interest rates.

Fed Governor Bowman emphasized the need for further rate hikes to bring inflation down to the Fed’s 2% target in a timely manner. Conversely, Governor Waller expressed growing confidence that current rates are appropriate, though he awaits more data for confirmation. Waller’s remarks led to a decline in Treasury yields, with the 10-year yield dropping about 5 basis points to around 4.34%.

Investors are also bracing for upcoming economic data releases, including an update on third-quarter GDP on Wednesday and Thursday’s PCE reading on consumer inflation, the Fed’s preferred inflation gauge. These data points are crucial in shaping expectations for the Fed’s next rate decision.

Adding to the mix, The Conference Board reported an increase in consumer confidence for November, with its index rising to 102.0, up from a revised 99.1 in October. Despite this uptick, the Expectations Index remained below 80 for the third consecutive month, a historical indicator of a looming recession within the next year.

The focus also remains on the retail sector, especially post-Black Friday. Cyber Monday saw consumers spending $12.4 billion online, marking a 9.6% increase from last year. Notably, a significant $15.7 million was spent every minute during the peak hours of 10 to 11 PM Eastern.

The day’s most significant developments, however, stemmed from the differing viewpoints of Fed officials Bowman and Waller. Their comments caused major intraday fluctuations in the market.

Bowman, speaking at the Utah Bankers Association and Salt Lake City Chamber Banker and Business Leader Breakfast, highlighted the persistently high level of inflation and the uneven progress in addressing it. She attributed some of the improvements to the resolution of supply-chain bottlenecks but expressed uncertainty about their continued impact on inflation. Bowman also raised concerns about potential inflationary pressures from a tight labor market and government policies like the CHIPS Act and Inflation Reduction Act.

On the other hand, Waller, in his speech titled “Something Appears to Be Giving,” acknowledged signs of an economy cooling and a gradual decrease in inflation. He referenced October’s retail sales data, indicating a slowdown in consumer spending. However, he cautioned that inflation remains too high and it’s premature to conclude whether the slowdown will be sufficient to achieve the Fed’s 2% inflation target.

The October Consumer Price Index revealed a “core” inflation rate of 4% year-over-year, a decrease from September’s 4.1% and the slowest since September 2021, yet still double the Fed’s target. Waller viewed this data as a positive sign, noting the broad distribution of the moderation in inflation across various goods and services.

As the Federal Open Market Committee prepares for its final meeting of the year on December 12-13, investors are not anticipating additional rate hikes. However, the majority of the rate-setting committee had previously projected one more rate hike this year in their September forecasts, leaving the door open for a potential increase in the upcoming meeting.

Translation: The November rally is probably over, but that doesn’t block the market out from enjoying a Santa Rally, too. Indecision from the Fed could push shares lower for a few weeks before soft economic data spurs stocks higher into Christmas (and slightly beyond) as part of one last bullish “hurrah” to close out the year.


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