The message from Fed Chair Powell yesterday was a downer for the stock market, which traded down as that message was being heard. Mr. Powell said a lot, but the point that registered was his view that it is very premature to talk about pausing the rate hikes and that the Fed still has a ways to go to get the policy rate to a restrictive level that is sufficient for getting inflation back down to the 2.0% target.
The added connection for market participants is that the Fed’s terminal rate is apt to be higher than previously expected and is likely to be held there longer than previously expected. Accordingly, the stock market’s “pivot hopes” were effectively dampened by the individual doing the driving.
Between the post-directive high and post-press conference low on Wednesday, the S&P 500 dropped 136 points or 3.5%.
The selling pressure has persisted this morning, too, primarily because the selling pressure in the Treasury market has persisted, Qualcomm (QCOM) delivered some disappointing guidance that is weighing further on growth stocks and investor sentiment, and health authorities in China have reportedly shot down the social media speculation that China will soon be shifting away from its zero-COVID policy.
Currently, the 2-yr note yield is up 20 basis points to 4.75% and the 10-yr note yield is up 15 basis points to 4.21%.
The S&P 500 futures are down 40 points and are trading 1.1% below fair value, the Nasdaq 100 futures are down 135 points and are trading 1.2% below fair value, and the Dow Jones Industrial Average futures are down 254 points and are trading 0.8% below fair value.
There has been a ton of earnings news since yesterday’s close. It hasn’t been all bad; in fact, most of the reports have been better than expected per usual. The guidance, however, has been spotty, and stocks like Qualcomm (QCOM), Roku (ROKU), Fortinet (FTNT), Qorvo (QRVO), Moderna (MRNA), and Cognizant Technology (CTSH) are paying a price for it.
Their struggles are a headwind for the market, yet the prevailing wind is the disappointment that the Fed sounds like it is intent on plowing ahead with more rate hikes and that it doesn’t know itself where the end point will be.
Granted future rate hikes might not be as aggressive as 75 basis points (like the last four hikes have been), yet the light of a pivot the market thought it saw at the end of the tunnel turned out to be a freight train yesterday.
On that note, a few other central banks chugged ahead with rate hikes of their own today. The Norges Bank raised its policy rate by 25 basis points to 2.50% and the Bank of England raised its policy rate by 75 basis points to 3.00%. Both moves were expected. Notably, there were two dissents at the BOE meeting that were rooted in a preference for a smaller increase of 50 basis points and 25 basis points, respectively.
The 10-yr UK gilt yield is up 17 basis points to 3.56% following along with other sovereign bond yields this morning.
In other developments, there was a batch of economic releases out of the U.S. at the bottom of the hour.
- Initial jobless claims for the week ending October 29 decreased by 1,000 to 217,000 (Briefing.com consensus 222,000) and continuing claims for the week ending October 22 increased by 47,000 to 1.485 million.
- The key takeaway from the report is that the low level of initial claims remains indicative of a tight labor market and a data point for the Fed that will keep it on a tightening path.
- Q3 Productivity increased 0.3% (Briefing.com consensus +0.5%) following an unrevised 4.1% decline in the second quarter. Unit labor costs jumped 3.5% (Briefing.com consensus +4.2%) following a downwardly revised 8.9% increase (from 10.2%) in the second quarter.
- The key takeaway from the report is that nonfarm business sector labor productivity decreased 1.4% from the same quarter a year ago, and the 1.4% decline marked the first time since 1982 that there have been three consecutive declines in this measure.
- The September trade deficit widened to $73.3 billion (Briefing.com consensus -$71.0 billion) from an upwardly revised deficit of $65.7 billion (from -$67.4 billion) in August.
- The key takeaway from the report is that exports were $2.8 billion less than August exports while imports were $4.8 billion more than August imports, reflecting in part the comparatively weaker activity abroad versus the activity in the U.S.
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Originally Posted November 3, 2022 – Powell blows prevailing wind of disappointment
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