Fed Up

There is some added meaning to this Hump Day. The stock market, which hasn’t had any problem of late getting over any humps, waits to hear from the Federal Reserve, which completes its two-day FOMC meeting. Currently, the futures for the major indices are trading in close proximity to fair value, which suggests the cash market is in store for a somewhat flattish start.

A new directive will be published at 2:00 p.m. ET and Fed Chair Powell will follow at 2:30 p.m. ET with his press conference.

Just about everyone expects the Fed to lay out a plan today to taper its asset purchases. The consensus view has coalesced around the notion that there will be a $15 billion per month reduction in the pace of purchases ($10 bln for Treasuries and $5 bln for agency mortgage-backed securities). Accordingly, the element of surprise here would be something that is above or below that expected amount.

This Fed, however, isn’t big on the element of surprise. Nonetheless, there is some potential for shock value if the directive and/or the Fed Chair makes it sound as if inflation, or inflation expectations, might need to be addressed sooner rather than later.

With the major indices at record highs, it can be said that there isn’t much fear about the Fed taking away the punch bowl. What will be interesting to see is if the stock market keeps charging on the expected outcome or sees it as an opportunity to sell the news following a huge run that has been predicated in part on the belief that the Fed isn’t going to raise its policy rate anytime soon.

Entering today, the S&P 500 is up 8.2% from its October 4 low. To be fair, that move has also been aided by reassuring earnings guidance rooted in an ability to push through price increases because of strong demand.

There has been a lot of earnings reports since yesterday’s close. There are too many to cover here.

Some of the luminaries include Lyft (LYFT), which is up 13.7% after topping estimates and highlighting a much improved driver supply issue, and Mondelez (MDLZ), which is up 2.3% after beating expectations.

Activision (ATVI) and Zillow Group (ZG), though, are in the fallout camp. ATVI is down 13.5% after guiding Q4 revenues below consensus and warning that it isn’t planning for a material contribution from Overwatch 2 and Diablo IV in 2022. ZG is down 13.9% after missing the Q3 consensus EPS estimate by a large margin and announcing the cessation of its troubled Zillow Offers business.

The biggest mover of note is Bed Bath & Beyond (BBBY). It didn’t report earnings, yet it announced the launch of a new digital marketplace, a collaboration with Kroger, and an expectation that its $1 billion three-year stock repurchase program will be completed by the end of this year. Shares of BBBY are up nearly 50% (they had been up as much as 80% in yesterday’s after-hours session) on yet another monster short squeeze.

Speaking of squeezes, Democrats in Congress continue to try to squeeze in changes to the reconciliation bill (e.g., suspending SALT cap; Medicare negotiating drug prices for the most expensive drugs) that are adding to the uncertainty of whether, and when, the bill could pass both houses.

In the same vein, some are suggesting a projected victory by the Republican gubernatorial candidate in Virginia could prompt some moderate Democrats to re-think their support for the reconciliation package, as some see that outcome as a harbinger of more Democratic losses in the 2022 midterm election. On the flip side, it’s possible that this projected victory could hasten a desire to get something done while Democrats still control the outcome.

It’s hard to tell, but the tell today is that there is still no sense of closure for the reconciliation bill.

There is a little sense of closure that hiring activity picked up in October. The ADP Employment Change Report estimated that 571,000 jobs were added to private-sector payrolls (Briefing.com consensus 370,000). It will be Friday’s Employment Situation Report, however, that steer’s the market’s attitude about hiring activity, as well as wage inflation.

For the time being, though, thoughts on the Fed’s policy position will be steering things today.

—

Originally Posted on November 3, 2021 – Fed Up