Wall Street is braced for a key Fed rate decision later today, with hopes of a ‘pivot’ from the Fed’s rate hike path underpinning October’s impressive rally.
U.S. equity futures edged modestly lower Wednesday, while the dollar slipped lower and Treasury yields firmed, as investors braced for a key meeting from the Federal Reserve later today that could dictate market direction for the remainder of the year.
Traders are fully expecting a 75 basis point rate hike later today in Washington, a move that would lift the benchmark Fed Funds rate to between 3.75% and 4% — the highest since 2008 — and mark the more aggressive policy tightening from any Federal Reserve since the Paul Volcker era of the early 1980s.
Central banks around the world, in fact, have been following the Fed’s lead, with at least 244 different rate hikes put into place this year, a pace of nearly one per trading day, as policymakers fight some of the fastest inflation rates on record while attempting to ensure that a fragile post-pandemic economy doesn’t slip back into recession.
That has given rise to bets on a so-called ‘pivot’ from the Fed, with investors looking for a clear signal that it plans to slow, or perhaps even pause, its relentless rate hike path
Markets are in near unanimity the Powell and his colleagues will deliver another 75 basis point rate hike today in Washington, the fourth in succession, but are largely split as to how the Fed will move when it meets again in December.
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The CME Group’s FedWatch tool, a real-time indicator for the direction of Fed Fund futures, suggests a 50.3% chance of a smaller 50 basis point hike in December, with bets on either a hold or a 25 basis point hike in February totaling 76.4%.
Headline inflation, however, is within touching distance of the fastest pace in four decades, personal incomes are also moving higher, and the September JOLTS report suggest some 10.7 million positions remained unfilled, a precursor to faster wage growth over the final months of the year as holiday hiring intensifies.
“The Fed will have to grapple with guidance and whether to flag the much-anticipated possible downshift from 75 basis point hikes at the December meeting,” said Saxo Banks strategists. “Given the recent easing of financial conditions and strong risk sentiment, the Fed may try to lean against the market and hawkishly keep all options on the table.”
With the Fed decision on tap, a Bank of England rate hike expected tomorrow in London, a key October jobs report slated for Friday and next week’s U.S. mid-term elections on Tuesday, market now face an important stretch of five trading days that could determine whether the solid October rally — in the case of the Dow, the best since 1976 — can hold into the end of an otherwise difficult year.
Heading into the start of the trading day on Wall Street, futures contracts tied to the S&P 500 are priced for a 1 point opening bell advance while those linked to the Dow Jones Industrial Average are priced for a 40 point dip. The tech-focused Nasdaq is priced for a 15 point bump.
In terms of individual stocks, CVS Health (CVS) – Get CVS Health Corporation Report was up 5% after it posted better-than-expected third quarter earnings, lifted its full-year profit forecast, and unveiled details of a $5 billion agreement to settle lawsuits linked to the U.S. opioid crisis.
Apple (AAPL) – Get Apple Inc. Report slipped 0.6% after officials in China ordered a seven-day lockdown around a key iPhone factory amid an ongoing Covid outbreak that could snarl production heading into the crucial holiday season.
Advanced Micro Devices (AMD) – Get Advanced Micro Devices Inc. Report shares jumped 2.44% after the chipmaker posted modestly weaker-than-expected third quarter earnings but noted solid gains in revenues for its gaming and data center businesses that partly offset further weakness expected in demand for personal computing chips.
In overseas markets, the Europe-wide Stoxx 600 up 0.06% in early Frankfurt trading, while London’s FTSE 100 fell 0.32%, as traders sifted through another active session of earnings release and braced for the Fed decision after the close of trading.
Overnight in Asia, the region-wide MSCI ex-Japan index was marked 0.8% higher as China stocks continued to rebound on the back of unconfirmed reports of easing lockdown restrictions, while Japan’s Nikkei 225 edged 0.05% lower as the government again hinted at potential intervention in foreign exchange markets as the yen holds at near three-decade lows against the U.S. dollar.