01 Nov WELCOME TO NOVEMBER
October was almost a mirror inverse of September. For the month the S & P advanced about 8.0%. September the S & P declined about 9.2%. The rationale…earnings and hopes that the Federal Reserve is nearing an end of hiking interest rate hikes.
For months, the markets have been eagerly awaiting a Federal Reserve pivot. All times these hopes have been dashed.
As noted many times, inflation is a two part phenomenon; too much money chasing too few goods fearing higher prices tomorrow. It has monetary and psychological component.
The Federal Reserve has been dogmatic in its intents to squelch inflationary pressure even at great expense to the economy.
With a $31 trillion and growing deficit, the nation can ill afford inflationary expectations to become unanchored.
In the early 1980s inflation declined by 50% but long-term interest rates increased by 50% with several Federal Reserve officials publicly questioning why such occurred. Interest rates should have dropped.
Historians are now stating the reason for that increase rested in the lack of confidence in the Fed’s ability.
As noted above, the Fed cannot lose the market’s confidence in its inflationary fighting prowess. As significant spike in yields may create fiscal havoc.
With the above written, however, the overnight yield has increased logarithmically in 2022…from 0.00% to the expected year end rate of around 4.5%.
On a percentage basis, Fed Funds increasing next year to 5% from either 4.5% or 4.75% is insignificant based upon the exponential 450-475 bps increase from 0.00% that occurred in 2022.
Nominally changing topics, third quarter earnings are not meeting dumbed down expectations as over 24% of companies who have posted results have missed forecasts, the greatest since 2008 according to Bloomberg.That begets the next question…why the October’s advance? This week 167 S & P 500 companies post results. How will they be interpreted?
Today is the commencement of the two-day FOMC meeting. The JOLTS Job opening is released as is the ISM Manufacturing Index, both tier I data points. How will the statistics be viewed?
Commenting on yesterday’s market action, energy stocks were whipsawed as the White House will call on Congress to consider tax penalties on oil companies. Tech was lower amid higher bond yields. The averages were downs between 0.40% and 1.10%.
Regarding the bond market, a record fourth consecutive 0.75% increase in Fed Funds is fully discounted with many hoping for a less hawkish sounding statement.
What will happen today?
Last night the foreign markets were up. London was up 1.64%, Paris up 1.80% and Frankfurt up 1.27%. China was up 2.62%, Japan up 0.33% and Hang Seng up 5.23%.
Dow and NASDQ futures are up 0.50% and 1.0%, respectively on rumors that China will “reopen” and the belief that the Fed will pivot “sooner than later” according to Morgan Stanley. The 10-year is up 24/32 to yield 3.95%.