Fed Reaction: Stocks Volatile Against Fed Downgrade Indexes, ADP Impress

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US stocks initially surged after the Fed provided enough hints that the end of the Fed’s tightening cycle was approaching. Stocks couldn’t hold their gains as Fed Chairman Powell has been trading high for 18 months and it’s too early to think about pausing rate hikes. Stocks could struggle here as the risk of the Fed taking rates above 5.00% is still looming.

FOMC

At first glance, it looked like Christmas might have come early for Wall Street, as the Fed hinted that it was about to downgrade to a slower pace of tightening. Fed funds futures were initially more confident that December would see a half-point rate hike.

The Fed made a fourth consecutive rate hike of 75 basis points, which brought the benchmark federal funds rate back to a range of 3.75% and 4.00%. The total rate hikes for the year are 375 basis points, and they probably have a few rate increases in mind.

The dovish part of the statement was that the Fed would take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

The hawkish part of the statement was that they anticipate that continued increases in the target range will be appropriate to achieve a monetary policy stance tight enough to bring inflation down to 2% over time.

The Fed remains data dependent and is expected to suggest that if the next two inflation readings (November 10 and December 13) and reports (4 Nov. and December 2) remain hot, they will remain aggressive in pushing politics further into restrictive territory.

Press conference

Powell reiterated his firm commitment to lower inflation. Without price stability, we will not achieve a strong and sustainable labor market. Powell made it clear that a downgrade would occur in December or February. But he avoided becoming too dovish by reminding traders that it is very premature to give thanks for the suspension of rate hikes.

ADP

Wall Street doesn’t give much importance to the because it’s only the third month of using its new methodology. The ADP report showed that job growth in the private sector remains strong, driven by medium-sized companies. ADP’s overall jobs growth figure was better than expected and was another reminder that the labor market remains robust. Hiring in the private sector rose by 239,000 jobs, better than the forecast of 185,000 and the earlier reading revised down from 192,000.

ADP’s Chief Economist said:

“While we are seeing early signs of Fed-induced demand destruction, this is only affecting certain sectors of the labor market.”

All the employment data points seem to suggest that this labor market refuses to break. Employment momentum will be problematic for traders who expect the Fed to send a convincing signal that it will downgrade to a slower pace of tightening in December.

Maersk

Global trade is slowing rapidly, according to the world’s largest owner of shipping containers. For 2022, Maersk expects global container demand to fall by up to 4% year-on-year, while the outlook for next year is broadly flat to negative. Maersk noted that freight rates peaked and began to normalize in the quarter, due to lower demand and reduced supply chain congestion.

Global recession fears are mounting, which is expected to disrupt global demand for transportation and logistics. The destruction of demand is helping container rates come back down to earth, and they will likely continue to fall.

Oil

held on to earlier gains after the EIA crude oil report showed energy traders that this market is not quite ready to swing into surplus. The 3.11 million BPD draw was bigger than expected, but not as big as the 6.53 million BPD draw published by the API last night.

There are signs that demand for crude is being destroyed as exports fall and demand for gasoline declines a bit. Nevertheless, supply risks remain on the table, which should keep this market tight for a little longer.

Gasoline inventories fell more than expected and hit the lowest levels since November 2014. Ahead of the EIA report, gasoline prices surged.

Oil prices rose after the Fed signaled that its aggressive rate hike cycle may be coming to an end. The risk that the Fed remains aggressive with a tightening and quickly plunges this economy into a deep recession is fading.

The dollar could weaken further here, which should be good news for commodities overall.

Effects

The initial weakening, which could continue if the Fed is convinced that inflation is slowing. For the dollar decline to accelerate, Wall Street needs to see weaker labor and inflation numbers.

Gold

is trying to get its groove back, and that could happen if the next labor market report and inflation data show weakness. The FOMC decision confirmed the Fed’s dependence on data, which means gold traders need some numbers on labor and inflation before the yellow metal can decisively break through the $1700 level.

Cryptos

continues to trade above the $20,000 level as the Fed confirmed what markets were hoping for; A slowdown in the tightening is expected. The Fed’s initial reaction was relatively strong for most risky assets, but was not sustained as the central bank will remain dependent on the next set of inflation data.

Inflation has been high for 18 months and the Fed will remain committed to using its tools, so we won’t get a green light on risky assets until inflation drops sharply.

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