Turkey down, Fed on deck

Stocks had a mixed close on Friday’s abridged session as the haze from Wednesday’s FOMC minutes… and maybe some turkey began to wear off. Most Fed policy makers believe that the pace of rate hiking should slow down.

Saying is believing. You would expect a person like me to tell you to focus on the numbers. Gut feelings and hearsay is for amateurs. If you DID expect me to tell you that, you were, in fact, correct. HOWEVER, just because those attributes are the province of amateurs, it doesn’t mean that markets will behave… um, professionally.  I understand if you want to believe that markets are rational, but they are not. To be clear, markets are rational over the long term, but in the short term… well, I suppose you already have your answer. Let’s dig in.

Even if you are an occasional reader (and I hope you are not), it is highly likely that if you read my morning note in the past 6 months you would have found at least some reference to interest rates, the Fed, market expectations, or inflation… or, all the above. Those separately and all together have been driving market behavior since last November. Initially, it was the unknown about what the Fed was going to do to fight inflation that caused great volatility, and by the end of the summer, it was the unknown about what the Fed was going to do after it fought inflation, AKA the “pivot”, that drove continued volatility.   

If you followed the economic numbers alone, you would have gotten a rough start as things went from bad to worse, despite what the “expert” talking heads on TV told us. Soon, however things appeared to turn around, albeit slowly. Throw in a few hiccups along the way and you got a negatively prone, volatile market. Three or so earnings seasons saw corporate confidence decline considerably and forward guidance revised downward due to economic headwinds. A strong labor market would stand in the way and not allow companies to lower prices. Aggregate job openings exceeded the number of unemployed workers, almost ensuring the consumer demand and subsequent inflation would never go away. However, by the earnings season that just wrapped up in earnest, we heard story after story about expected job cuts. That is hardly a sign of a strong labor market. So, perhaps, the Fed’s tight monetary policy was starting to work. All of that birthed investors’ hopes that the Fed would soon pivot away from rate hikes. That would be bullish for both stocks and bonds. But unfortunately, there are no guarantees and markets gyrated around each minor miss and beat as hopes rose and were dashed, sometimes multiple times in a single session.

If you followed the many, many words of Fed policy makers from the Chief on down through the ranks, the message was quite clear. Inflation was a bad problem, and the Fed was going to bust it at all costs. Rate hikes would be super-sized, and they would not let up until the job was done. There were even some “don’t get your hopes up silly mortals, we are going to hike, hike, hike until the enemy is crushed” messages. With each of those, the nascent bulls were dejected, and ground was lost. Ground was retaken with every hint of a slowing economy… only to be once-again relented with a fresh, hawkish Fed comment.

If we step back and look at what the markets were expecting, we would have indeed seen a rise over time in what the market was expecting to be the terminal rate, that is the rate at which the Fed would stop hiking. Since the summer, that went from 3.5% to 4%, and ultimately came to rest at around 5%, which is where it has been since late September. Sure, it moves up and down but not by much more recently, indicating that we are closing on it. With one more FOMC meeting for the year and all those market expectations there is a lot of tension buildup in the markets. We have two more inflation figures, one in the week ahead and one in 3 weeks. We also have one last big read on the labor market this upcoming Friday. Fed rhetoric has been strongly hawkish with a few, a scant few, dovish inuendoes. Somewhat unexpected was last week’s FOMC minutes which contained the line “a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.” Remember that those minutes were from the FOMC meeting that took place on November 2nd. Since that meeting, we have gotten quite a bit of hawk talk from policy makers. In addition, we got some positive surprises in softer than expected inflation figures. What does this all mean. Publicly, the Fed is still in hawk mode hinting at bigger and more rate hikes while privately they are looking for an offramp. Additionally, unlike yours truly, the Fed is known for its brevity, so adding a modifier like “substantial” is, in fact, a substantial clue that the bankers are ready to relent… if the numbers keep going in their way. Fed funds did not substantially move since the release of the minutes, but we can certainly expect some potential adjustments with this week’s economic releases.

FRIDAY’S MARKETS

Stocks had a mixed close in Friday’s stunted session, amidst expectedly low volume. The S&P500 slipped by -0.03%, the Dow Jones Industrial Average gained +0.45%, the Nasdaq Composite Index fell by -0.52%, and the Russell 2000 advanced by +0.30%. Bonds gained and 10-year Treasury Note yields slipped by -2 basis points to 3.67%. Cryptos climbed by +0.47% and Bitcoin slipped by -0.28%.

NEXT UP

• Dallas Fed Manufacturing Activity (Nov) may have slipped to -22 from -19.4.
• The week ahead: some important earnings announcements,more housing numbers, Consumer Confidence, GDP, PCE Deflator, JOLTS Job Openings, Beige Book, and the monthly employment numbers. Please refer to the attached economic and earnings calendars for times and details. Pro tip: I include these calendars every Monday and I highlight the important numbers within so you can push snooze on your alarm once or twice.