What Fed Chairman Powell can say to keep the stock market rally---or kill it

What Fed Chairman Powell can say to keep the stock market rally—or kill it

Whatever Federal Reserve Chairman Jerome Powell says when he takes the podium on Wednesday will likely have ramifications for financial markets.

But what do equity investors need to hear from the Fed Chairman for the rally to continue? Market strategists who spoke with MarketWatch have a few thoughts.

More importantly, anything Powell says to harden expectations of a 50 basis point interest rate hike in December is likely to push stock and bond prices higher, said Jake Jolly, senior investment strategist at BNY Mellon. Bond yields fall as prices rise, and vice versa.

On the other hand, anything that leaves investors with the impression that another massive interest rate hike remains a possibility in December could have the opposite effect.

“What is going to be most critical is how much [Powell] tells us about December,” Jolly said.

“If Chairman Powell is relatively quiet and unwilling to discuss his thinking, to me that might be a hawk,” Jolly said. “That means it will remain a very data-driven decision.”

“Markets like certainty, they don’t like to ‘wait and see’,” he said.

Lily: Another massive Fed rate hike is expected this week – and then life gets tough for Powell

Powell and his fellow policymakers are expected to offer a fourth straight rate hike of 75 basis points, or 0.75 percentage points, at the end of their two-day meeting on Wednesday. Investors focused on the outlook for the December meeting.

Derek Tang, an economist at Monetary Policy Analytics in Washington, told MarketWatch that any sign that Powell is clinging to the possibility of another 75 basis point hike in December and rate hikes in the first or second next year’s quarter would likely be “really hit”. stocks” and led to a rally from this year’s stock selloff, which sent the S&P 500 SPX,
Dow Jones DJIA Industrial Average,
and Nasdaq Composite COMP,
in a bear market.

Even though Powell signals that the Fed will almost certainly slow the pace of interest rate hikes starting in December, the interim period will still be fraught with event risk for equities.

Investors will receive two months of inflation data between the close of the Fed’s two-day November policy meeting on Wednesday and the start of its December meeting on Dec. 14. And there is also the matter of the US midterm elections, which are scheduled for November 8, as well as the possibility that expectations for 2023 corporate earnings will begin to weaken, as Michael Wilson has repeatedly pointed out. of Morgan Stanley.

If Powell is serious about convincing investors that the Fed intends to slow the pace of interest rate hikes to give the economy and markets more time to adjust, he’ll have to find a way to do it. while simultaneously communicating that the fight against inflation remains the central concern. bank priority.

“Chair Powell will need to convince traders and investors that the Fed is still steadfast in its commitment to bring inflation down, but that can be accomplished with a steady dose of lower rates,” said Quincy Krosby, chief global strategist at LPL Financial.

See: Dow on track for record October as Big Tech tanks: What’s next for stocks as investors await Fed clues

As always, the risks will be concentrated in Powell’s Q&A session, which isn’t as tightly choreographed as the opening statement. It’s possible that Powell could speak poorly or say something that offends investors the wrong way.

“There’s the statement, which is carefully planned, and then there’s the Q&A, where it’s easier to make a mistake and there’s a bigger margin for error,” said Tang of Monetary Policy Analytics.

As inflation continues to hover near its fastest pace in 40 years, the Fed has some progress to report, market strategists said.

According to the latest reading of the Personal Consumption Expenditures Price Index released on Friday, underlying prices, which eliminate volatility in food and energy prices, accelerated more slowly in September compared to the previous month.

However, year over year, they still increased at a rate of 5.1% last month, compared to 4.9% in August.

But on a more positive note, wage growth slowed in the third quarter, according to Friday’s reading of the employment cost index. Wages rose 1.2% last quarter after rising 1.3% in the quarter ended June.

It’s possible that Powell is using slowing wage growth to justify moderating the pace of rate hikes, market strategists said.

Expectations about the size of the Fed’s December hike have shifted since an October 21 Wall Street Journal report said policymakers were heading for a 75 basis point hike in November, but were on the point of debating the magnitude of a December increase.

But so far, the messages from the Fed have left plenty of room for doubt, and that has been reflected in the interest rate futures markets.

Fed funds futures traders put the odds of a 50 basis point hike in December at 44.6%, while the odds of a 75 basis point hike stand at 49.5%, according to CME’s FedWatch tool.

This suggests that investors are waiting for Powell to confirm that the downturn is indeed underway. After being burned several times over the past year, including when Powell sent stocks plummeting with a terse and surprisingly hawkish speech in Jackson Hole, Wyo in August, it’s perhaps unsurprising that some investors remain skeptical.

According to a tally maintained by Deutsche Bank strategists, the Fed has rigged markets hoping for a change in policy nearly half a dozen times over the past year.

Although stocks have tended to rally during Fed decision days this year (with the central bank’s September meeting being a notable exception), markets have tended to be volatile in the days following the Fed’s decision. meeting, Jolly pointed out.

Any relief brought to stocks by Powell’s statement could also be short-lived. After the November meeting ends, investors are likely to turn back to trying to figure out where benchmark interest rates will peak and how long they need to stay there before the Fed can return to another rate cut, Jolly said.

Ultimately, investors will have to wait until December to receive another update to the Fed’s “dot plot,” which is a set of expectations from senior Fed officials regarding the path that interest rates might take. interest.

US stocks are trading lower on Monday, which is the last trading day of October, with the S&P 500 down 0.6%, the Dow Jones Industrial Average down 0.2% and the Nasdaq Composite up. down 0.9%. But all three major indexes still hold onto their gains for the month, with the Dow Jones on track to post its best October and best monthly performance since the 1970s.

—Vivien Lou Chen contributed to this article.


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