All market eyes on the Fed today as interest rates are set to rise by another 75bps
While European markets started the month on a positive note, and look set to continue that vibe this morning, US markets lost their early momentum, finishing the session lower, after the latest job openings numbers, and ISM manufacturing report, showed that the US economy remained in decent shape, despite concerns over an economic slowdown.
“We could see further evidence of a robust labour market later today with the October ADP employment report, which is expected to show 178k new jobs added, a modest slowdown from September’s 208k, as the Federal Reserve gets set to announce its latest rate decision, after European markets close today,” Michael Hewson, Chief Market Analyst at CMC Markets UK, writes this a.m.
Before that the markets get the latest updates to the recent flash PMIs from Germany, France, Italy, and Spain, all of which are expected to slip back further into contraction territory, with readings of 45.7, 47.4, 46.9 and 47.6, respectively.
Hewson pointed out that the Fed isn’t expected to surprise today when it is expected to raise the Fed Funds rate by another 75bps, pushing it up to 4 per cent, following on from three similar moves in June, July and September.
“The main focus of attention has shifted in the past few days towards what might be coming in December, as markets increasingly price the prospect of a policy pivot, pause or slowdown, as we head into year end,” he explained.
With the mid-term elections coming in a few days’ time, it’s hard to see how Powell will be able to draw a line between today’s press conference and the December meeting when there will be two CPI reports, as well as two jobs reports between now and then.
If as the Fed says it is driven by the data then he will have to keep the prospect of a 75bps rate rise on the table if he is serious as he said back on September, that the FOMC were “strongly committed” to driving inflation lower, Hewson noted.
“His insistence that there was no painless way to drive inflation lower, is equally as valid now as it was then and while we have seen some central banks slow the pace of their own tightening cycles in the form of the RBA and the Bank of Canada, this is mainly down to concern over their housing markets.”
Change of tone
It is true that the US housing market is struggling, but is it struggling enough to warrant a softening of tone?
The Fed’s change of tone in September was also markedly different, with the Fed downgrading its annual GDP target to 0.2 per cent in 2022, with Powell admitting that a recession might be possible.
Core inflation is forecast to decline to 4.5 per cent this year, before falling to 2.1 per cent by 2025.
Hewson said that, since then, there has been little evidence of that and since then we’ve had a succession of Fed Presidents talking up the prospects of even more aggressive tightening, with the prospect that we might see another 150bps by year end which would put the Fed Funds rate at 4.75 per cent by year end.
“In the last few weeks, we have seen some chatter that some Fed officials were becoming uneasy at the pace of the current hiking cycle.”Michael Hewson
Hewson stressed that would seem eminently sensible but for the fact that apart from Fed vice chair Lael Brainard, and San Francisco Fed President Mary Daly there has been precious little articulation of that line from any Fed officials in recent public speeches.
“It’s especially noteworthy when you have the likes of Neel Kashkari of the Minneapolis Fed who has traditionally been one of the more dovish members of the FOMC, showing little sign of the need for a pause or a pivot at this point,” he added.
“This might suggest that for all the market optimism the smart money is on the bar being set very high for the Fed to consider a slowdown in the pace of rate rises, if core inflation is still rising,” Hewson pointed out.
Nonetheless the first evidence that splits might be starting to open up could be interesting in the context of when we might start to see the beginnings of a discussion of the need for a stepping down in the pace of rate hikes, starting next month.
“It’s still a big ask when there are 2 CPI prints between now and December.”
Thus, the Powell press conference is likely to be just as important in the context of whether he comes across as hawkish, as he did in September, Hewson concluded.