Stock bulls are disappointed by the decidedly “hawkish” message delivered by Federal Reserve Chair Jerome Powell yesterday who warned that rate hikes would continue, possibly to higher levels than currently forecast.
Fed message
As expected, the central bank lifted its benchmark rate by 75-basis points for the fourth time in a row now, bringing the Fed funds target range up to +3.75-4.00%.
Bulls are now pointing to an addition in the latest policy statement stating that the Fed “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.”
Bulls take that to mean that Fed officials want to slow down the tightening program in order to give the work they’ve already done time to filter through the economy. This hints at a plan mentioned by officials previously to “step down” the pace of rate hikes. Meaning rate increases might get progressively smaller and less frequent, though not stop.
Bears, however, see less room for optimism after Powell said the Fed still “had a long ways to go” and indicated that the rates may ultimately need to move higher than forecast in September because the inflation picture has gotten “more and more challenging.” The “dot plot” forecasts from that meeting saw the policy rate ending 2023 in the +4.50-4.75% range.
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Bears and bulls both seem to agree that the chances for a so-called “soft landing” have gotten very slim with anticipation of recession in 2023 now widespread. The difference is in how deep the two sides think a downturn will cut.
Also matters
Wall Street insiders believe the bigger risk for stocks is still posed by an “earnings recession” as the post-pandemic bust continues to deflate lofty valuations. Bears are warning the pain will likely get worse for businesses that have been counting on China for future growth as the country digs in on its “zero Covid” policies that have crushed its economy.
Keep in mind, China’s lockdowns have also hit earnings of American companies, many of which are again currently being impacted under new lockdowns that began this week.
That includes Apple’s largest iPhone manufacturing plant, located in Zhengzhou. Q3 earnings growth for the S&P 500 was on track for a gain of just over +2% at the start of the week. However, stripping out the energy sector, S&P 500 companies are reporting a decline of -5.5%.
On the earnings front today, results are due from Amgen, Cigna, ConocoPhillips, Corteva, Moderna, Monster Beverage, Nintendo, PayPal, Starbucks, and Zoetis. Economic data includes the ISM Services Index, International Trade, Productivity and Costs, and Factory Orders.
Fed’s “Hawkish” Message In Detail
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