Right now, the Federal Reserve’s benchmark short-term interest rate stands at a range of 3.75% to 4.00. Expectations on Wall Street point to another 50 basis points in December and another 50 basis points in February.
Which would take the interest rates up to a range of 4.75% to 5.00%. Would that be the peak?
At first investors and traders thought they heard the Federal Reserve signal that the central bank was thinking about a pivot to a policy of cutting interest rates. And stocks rallied. But then Fed chair Jerome Powell “clarified” the Fed’s thinking in his post-meeting press conference. It would be “premature,” Powell said, to think about pausing the Fed’s policy of increasing interest rates to fight inflation. The Fed, he added still had a “ways to go” and the “Ultimate level of interest rate will be higher than previously expected.” Powell stressed that the Fed’s goal continues to be a reduction in inflation and that the Fed is surprised at how sticky prices are and that inflation hasn’t given up more ground to the Fed’s six interest rate increases in 2022.
The JOLTS survey from the Department of Labor showed a big jump in job openings in September. Which raised market worries that the Fed will raise interest rates tomorrow, November 2, by a hefty 75 basis points and signal that it is farther away from a pivot toward lowering interest rates than this recent rally has hoped. The Job Openings and Labor Turnover Survey showed that the number of available positions climbed to 10.7 million in September from a revised 10.3 million in August. Economists surveyed by Bloomberg were looking for a drop to 9.8 million openings.
Today, Monday, October 31, it’s Morgan Stanley strategist Michael Wilson, who until recently was a Bear, joining the “the Fed is about to pause or end its interest rate increases” camp. Indicators including the inversion of the yield curve between 10-year and three-month Treasuries “all support a Fed pivot sooner rather than later,” Wilson wrote to clients today. “Therefore, this week’s Fed meeting is critical for the rally to continue, pause or even end completely.”
The Fed is widely expected to raise its short-term benchmark interest rate by 75 basis points–to a range of 3.75% to 4.00%–at its Wednesday meeting. The CEM FedWatch Tool, which uses prices in the Fed Funds Futures market to calculate the odds of a Fed move, put the odds of a 75 basis point increase at 86% today, up from 82.2% on Friday. The remaining sentiment is betting on a 50 basis point increase. No one is expecting just a 25 basis point increase.
Inflation as measured by the Personal Consumption Expenditures index, the Federal Reserve’s favorite inflation guide, rose at an annual rate of 6.2% in September, according to data released today, October 28. The core index, which excludes more volatile prices for food and energy, rose at an annual rate of 5.1%. The month-to-month gain in the overall PCE was 0.3% and the core index climbed a month-to-month 0.5%.
Signs of weakness in the U.S. economy in the report on third quarter GDP released today, October 27, would argue that Federal Reserve interest rate increases designed to slow the economy and control inflation may be working. But investors and traders don’t expect the Fed to back off just yet–at least not at the November 2 and December 14 meetings of the Fed’s Open Market Committee. It’s simply too early for the Fed to declare victory and head to the sidelines.
The two-day bounce in U.S. stocks stalled today. The Standard & Poor’s 500 closed down 0.67% and the NASDAQ Composite was down 0.40%. Why? Increased sentiment that the Federal Reserve will raise its target short-term interest rate by a hefty 75 basis points at its November 2 meeting and its December 14 session. While the 75-basis-point increase at the November 2 meeting has been expected for some time, the shift in sentiment for the December 14 meeting is new.
After Thursday’s surprising and disappointing higher-than-expected CPI inflation number stocks rallied–but bond prices sank and bond yields rose on expectations that higher inflation means faster interest rate increases from the Federal Reserve. How much higher?
Economists surveyed by Bloomberg are looking for core inflation, that is inflation without volatile food and energy prices, to return to a four-decade high in tomorrow’s report of CPI inflation in September. Projections are looking for a 0.4%increase n core inflation in September and an annual rate of increase of 6.5%. That would match the March rate that was the highest since 1982. About a third of economists in the Bloomberg survey, however, expect an annual rate of 6.6% or more. The economists in the survey do expect a decline in headline (that is, all items) inflation to an 8.1% annual rate.
I’m adding Puts on Apple (AAPL) and Alphabet (GOOG) to my Volatility Portfolio today as insurance against a big market dip on a bad (as in high) Consume Price Index inflation number tomorrow, October 13, and against selling in the shares of these two stocks on their earnings reports on October 27 and October 25, respectively.
Somehow stocks seem to be turning this into good inflation news this morning ahead of tomorrow’s big CPI inflation report–The Standard & Poor’s 500 is up 0.19% as of 12:30 p.m. New York time and even the NASDAQ Composite is slightly ahead with a gain of 0.06%–but, frankly, I don’t see how. The September producer price index (PPI), a measure of prices at the wholesale level, rose 0.4% in September after falling 0.2% during August. Economists had expected a 0.2% increase,
Thursday’s CPI inflation report for September will overshadow everything else scheduled for this week, including the beginning of earning season. The report is so important because the financial markets continue to look for clues on how many more times the Federal Reserve will raise interest rates and how soon the central bank might begin to cut rates. For investors, the report is especially challenging because 1) there’s the task of getting the numbers right, and 2) there’s the question of how the market will react to those numbers.
