Wall Street will continue to digest the latest Federal Reserve statements through today and beyond. The central bank’s two-day monetary policy meeting concluded yesterday afternoon. The Federal Open Market Committee (FOMC) did not provide any major surprises with its monetary policy decision, as it raised the benchmark short-term interest rate by an expected 0.75%, bringing the federal funds rate to the range of 3.75%--4.00%. The Federal Reserve also announced the continuation of the bank’s balance sheet reduction, which is designed to shrink the money supply. Less liquidity in the financial system reduces the purchasing power of both businesses and consumers and, in time, should lead to reduced demand for goods and services and ultimately push prices lower. This morning, we learned that the Bank of England also increased its benchmark short-term interest rate by 0.75%.
The equity market initially rallied on the Fed statement, which most market pundits believed suggested the central bank will slow down the pace of its hikes and would base its future policy decisions on what impact earlier-year interest-rate increases are starting to have on the strength of the economy, considering the lag between the time of tightening actions and when they show up in current economic statistics. The Fed statement raised sentiment that the speed and ultimate size of interest rate hikes going forward would be smaller and that we may eventually see a pause in the Fed’s increasingly restrictive policies.
However, Federal Reserve Chairman Jerome Powell quickly walked back this thinking in his press conference, saying that the Fed has a lot more work to do and that continued rate hikes are appropriate. He also suggested that the federal funds target rate may have to go higher than previously expected and possibly remain at a more-restrictive level for a longer duration to bring down stubbornly high inflation. Chairman Powell reiterated several times during his remarks that the central bank has not seen enough signs that inflation is coming down. The market reversed course on Mr. Powell’s hawkish commentary and ended yesterday’s session deep in negative territory, with the Dow Jones Industrial Average, NASDAQ Composite, and broader S&P 500 Index falling 1.6%, 3.4%, and 2.5%, respectively. Futures markets indicate some further deterioration when the market opens today.
The recent labor market reports also have not given the central bank any reason to consider pausing on the monetary policy tightening front. Earlier this week, the Job Opening and Labor Turnover Survey (JOLTS) showed more job openings than expected, which is likely to result in employers having to offer higher salaries to secure sufficient labor to fill their vacant positions. This may put additional upward pressure on wages and add to the continued inflation woes. A stronger-than-expected reading on October private-sector hiring from Automatic Data Processing (ADP) yesterday and still low initial weekly jobless claims (totaled 217,000 for the week ending October 29th) suggest that the U.S. labor market remains tight, which also doesn’t help the Fed in its fight to tame inflation. Investors will get more insight into the health of the U.S. labor market tomorrow morning (at 8:30 A.M. EDT), with the release of the Labor Department’s report on October employment and unemployment. This morning, we also learned from the Department of Labor that productivity increased 0.3% in the third quarter, which was short of the consensus expectation of +0.4%.
Meantime, the earnings news from Corporate America continues to flow in, but with many of the industry leaders not on the schedule this week, there is not enough big news to take the attention of Wall Street away from the Federal Reserve and associated Treasury market yields. We did learn that Qualcomm (QCOM) surpassed revenue and earnings per share expectations, but shares of the semiconductor company are down in pre-market action on a dour near-term outlook, which includes a likely drop in demand. Likewise, the stock of Roku (ROKU) is looking at a lower opening after the streaming service said that it expects lower fourth-quarter revenue and a wider-than-anticipated loss.
The rise in Treasury market yields (the yield on two-year Treasury notes, at 4.71%, is approaching its most recent high of 4.76%) and the jump in the value of the U.S. dollar on Chairman Powell’s hawkish commentary is putting downward pressure on equities. The continued inversion of the Treasury market yield curve also continues to suggest we are heading toward a recession at some point.
The technology, communication services, and consumer discretionary sectors were the biggest laggards during a session that saw all 11 equity groups finish in negative territory yesterday. Our sense is that the consumer discretionary stocks, particularly those of the retailers, will remain under selling pressure, as consumers more and more feel the pain of higher prices and rising credit card interest rates and monthly payments. The quarterly results from the retailers will start pouring in next week and will provide investors with a better reading of how those companies are feeling ahead of the fast-approaching holiday shopping season. Conversely, the financial stocks were helped by the prospect of continued higher borrowing costs, which would boost the net interest income at the banks. In general, there was a notable move away from the higher-growth, but often more volatile, sectors and into the more defensive groups, including utilities, consumer staples, and healthcare. This scenario looks to be in play again today, with the selling to continue at the start of the trading day stateside.
In brief, though most of the nation will turn back our clocks to Standard Time this weekend, there is pressure on the market as Chairman Powell’s remarks make it clear the Federal Reserve is not close to turning the page in its current playbook of interest-rate tightening. – William G. Ferguson
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
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