Federal Reserve Chair Jerome Powell has the power to make or break markets these days. On Wednesday, he opted to disappoint.
What's happening: The central bank announced its fourth straight interest rate hike of three-quarters of a percentage point, continuing its aggressive and unprecedented campaign to get inflation under control.
What investors honed in on, however, were Powell's comments about where interest rates could peak — and how long they could stay there before the Fed changes course.
"The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive," Powell told journalists. The Fed, he said, "may move to higher levels than we thought."
That's causing the market to recalibrate, denting hopes that a meaningful policy pivot could be coming soon.
The backdrop: Given how hard the Fed has already gone — and an expectation it wouldn't want to overshoot, since rate hikes take time to feed through to the economy — US stocks leaped in October. The Dow rose 14%, logging its best monthly gain since January 1976.
This huge run-up now looks to have been very premature.
The S&P 500 sank 2.5% on Wednesday, while the Dow dropped more than 500 points, shedding 1.6%. Global stocks markets continued to push down on Thursday.
Meanwhile, the US dollar rose and government bond yields — which move opposite prices — climbed. The yield on the 2-year US note is now at its highest level since 2007.
"What we did see was a more hawkish message than markets had anticipated," Laura Cooper, senior macro investment strategist at BlackRock, told me. "Essentially, it killed the pivot dreams."
Economic data, particularly for the labor market, still looks relatively strong. US job openings unexpectedly surged in September, with 1.9 for every available worker. The latest jobs report on Friday is expected to show the economy added another 200,000 positions in October — down from last month, but still a very solid number.
Powell said that "incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected."
Guillaume Menuet, Citi Private Bank's head of investment strategy and economics in Europe, the Middle East and Africa, said the recent stock market jump "clearly has the hallmarks of a bear market rally."
It was built in part, he told me, on the "mistaken expectation of an imminent Fed pivot." This week, the wake-up call arrived.
Comments
Post a Comment