Stocks fell this morning as traders waited for the Fed’s November rate hike. The Dow, S&P, and Nasdaq Composite all sold off with Tech shares leading the way lower. Treasury yields idled as the 10-year rate remained mostly unchanged through noon.
Today’s rate hike, while a big deal, isn’t nearly as significant as Fed Chairman Jerome Powell’s post-FOMC press conference. A 75 basis point hike this afternoon is virtually guaranteed (and already priced in). It’s highly unlikely that Powell will reveal a surprisingly large or small hike at 2 pm EST.
What investors really want to know about is the Fed’s stance for December and beyond, which is a bit up in the air following Big Tech’s bad earnings season.
Make no mistake, the market will be hanging on each and every one of Powell’s words. He must choose his comments carefully.
“Continuation of the year-end rally is contingent on the Fed delivering on the pivot narrative,” wrote Barclays strategist Emmanuel Cau in a note this morning.
“Peak hawkishness may fuel more FOMO, but should not be confused with dovishness, as CBs continue to walk a fine line. Rate cuts have been a precondition for equities to start a new bull market in the past – we’re not there yet.”
Yesterday’s JOLTS report revealed a shocking surge in job openings, showing that US labor remains extremely tight. ADP reported a bigger-than-expected rise in private payrolls this morning, too, casting doubts on a Fed pivot. The Bureau of Labor Statistics (BLS) releases the October jobs report this Friday.
Depending on how Powell’s press conference goes this afternoon, the jobs report could have a major impact on the Fed’s rate hike schedule.
The market has priced in a 5% terminal rate as of May next year. This was reflected in the fed fund futures market, where the May contract was priced at 5.02% earlier today.
The Fed says it’s targeting a terminal rate of just 3% to 3.25% by comparison.
“Over the last two weeks, [the May contract has] been bouncing around 5%,” explained BMO rates expert Ben Jeffery.
“The base case is 75 [basis points] today, 50 in December, and 25 in February.”
The market sees about a 50% chance that the Fed sticks with 50 basis points in December.
Yardeni Research President Ed Yardeni, however, believes the odds favor a 75 basis point increase next month with inflation still stubbornly high.
“[Powell] still has an inflation problem. There’s been some signs of a peak in inflation, but nothing definitive showing that they’re making a great deal of progress in bringing inflation down,” he said.
“So I think he’s going to indicate there’s going to be another 75 basis point increase in December.”
“But he might hint after that, that the Fed’s fund rate is in restrictive territory now and that they’re just going to keep it there for a while and see how it impacts the economy.”
In other words, Yardeni expects a strong hike in December followed by an abrupt halt in rates. That’s essentially the same as the current base case – a total of 150 basis points (75 today, 50 in December, 25 in February) – but frontloaded instead of being spread out until February.
It’s debatable whether that would be better for markets or not. It almost certainly favors short-term traders, though, who would have the opportunity to ride a rate hike-driven correction down before buying the dip following a December Fed pivot.
We’ll see what happens at 2:30 pm EST when Powell takes the podium. Until then, investors will continue to watch and wait.