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U.S. Fed restates the obvious

Published on 11-09-2022

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But no positive message in Powell’s no-surprise press conference

 

As the mother of three, I’ve learned over the years the dangers of telling my children what they already know but don’t necessarily want to hear. Some of my favorite pearls of wisdom include “If you eat all your Halloween candy tonight, you’ll get sick,” and “If you go out in January in that halter top, you’ll be very cold.” Or my all-time favorite: “If you open that bottle of glitter, we’ll never get glitter out of our house.” Those and many other obvious statements, while all true, were met with significant derision and negativity. My experiences as a mother came in handy last week as I watched markets react to being told what they already knew but didn’t necessarily want to hear.

What did the Fed tell us?

The U.S. Federal Reserve hiked rates 75 basis points last week. That was no surprise; markets were anticipating it. And markets initially reacted positively. In fact, there seemed to be a fixation on one sentence in the Federal Open Market Committee (FOMC) announcement that was viewed as dovish: “In determining the pace of future increases in the target range, the Committee will 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.”1

But then came the press conference, which brought new meaning to the expression “quit while you’re ahead.” It just wasn’t as positive as markets had anticipated in the weeks leading up to the meeting, but Fed Chair Jay Powell said nothing that markets didn’t already know. A few excerpts from the presser2 and my reactions:

An encouraging sign in U.S. jobs

In short, investors shouldn’t be frightened by the Fed press conference last week, in my view. I expect the Fed will start to “downshift” tightening to 50 basis points in December, barring some surprising data in the next several weeks. And hopefully upcoming inflation data will be supportive. I was encouraged by last week’s U.S. jobs report. While it indicated a still-strong labor market, wage growth is moderating. This is supporting my thesis that a “softish” landing – or at least a not-so-hard landing – is still possible because of the unique nature of the U.S. job market. There are so many job openings that if companies emphasize hiring freezes over layoffs, I expect job mobility to decrease and wage growth to be tempered materially without a very significant rise in unemployment.

A rate hike in the U.K.

It’s also worth noting that the Bank of England (BOE) decided to hike rates by 75 basis points last week. Again, we heard some things that we didn’t want to hear but that we already know. But we also heard something that we didn’t know but were happy to hear.

The Monetary Policy Committee anticipated a “very challenging outlook for the U.K. economy” in the minutes of their meeting, with an expectation of being “in recession for a prolonged period.” None of that is positive – but none of that is surprising either. However, Bank of England Governor Andrew Bailey positively surprised markets with this statement: “We can't make promises about future interest rates, but based on where we stand today, we think Bank Rate will have to go up by less than currently priced in financial markets.” 6

This contrasts dramatically with Powell’s comments. While this likely reflects the more difficult economic circumstances the U.K. finds itself in versus the U.S., any time a central bank can positively exceed market expectations, that is welcome. Despite this difference, I suspect the BOE and the Fed are moving in the same direction, heading for a shift to smaller rate hikes. Jumbo-size rate hikes carry with them more risk, as I’ve said before, and so the sooner that central banks can get back to more “normal” increments in rate hiking, the better.

Looking ahead

While the U.S. midterm elections dominate the news cycle this week, the big focus in the U.S. for markets will be on the October Consumer Price Index print. I will also be focused on consumer inflation expectations from the University of Michigan and New York Fed. In coming weeks, we will want to follow Chinese economic data and markets closely. Chinese stocks experienced a strong rebound last week on oversold conditions that led to attractive valuations (as I noted in last week’s blog). There’s excitement around signs of a post-Covid economic reopening/rebound, as well as progress with U.S. audit inspections, as the first round finished ahead of schedule last week.

Finally, superstitious investors may be interested to know that the Houston Astros defeated the Philadelphia Phillies to win the World Series. Over the last century, Philadelphia baseball championships have coincided with some of the worst times in U.S. financial history, including 1929 (preceding the Great Depression), 1980 (a major recession), and 2008 (the Global Financial Crisis).7 This is no more than a coincidence, of course, but it’s a piece of trivia that’s gotten a lot of attention given the superstitious nature of both investors and baseball fans. I’m sure there are at least a few of you reading this blog who, despite knowing better, are breathing a sigh of relief – just in case.

Kristina Hooper is Global Market Strategist at Invesco.

Notes

1. Source: FOMC statement, Nov. 2, 2022).
2. Source: Federal Reserve, Jay Powell press conference, Nov. 2, 2022.
3. Source: Alan Blinder, Wall Street Journal Op-Ed, “Why a 2023 Recession May Be Mild”, Oct. 30, 2022.
4. Source: FOMC Summary of Economic Projections, Sept. 21, 2022.
5. Source: Bloomberg News, “Summers Sees Risk Fed Needs to Hike Past 6% to Curb Inflation,” Nov. 4, 2022.
6. Source: Reuters, “BoE's Bailey: We think rates will rise by less than markets expect,” Nov. 3, 2022.
7. Source: The Wall Street Journal, “If the Philadelphia Phillies Win the World Series, Prepare for an Economic Crisis,” Oct. 27, 2022.

Disclaimer

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