What a difference a day makes.
We’re certainly not out of the woods yet but we got a 1.8% move up in the S&P 500 yesterday, taking us back to 3,979 and that should be enough momentum to at least re-test the 4,000 line from below. We can thank Canada yesterday for their 0.75 rate hike that turned our Dollar 1% lower and gave the markets a huge boost – even while oil collapsed (now $82.20).
This morning, the ECB should keep the party going with their own rate hike and our reading of the Beige Book yesterday, in our Live Trading Webinar, determined that there’s a pretty good chance the Fed will only hike 0.5% at the next meeting – and we’ll see what Powell has to say about that this morning as well.
So far, this is all what we expected, when we expected but next week we get back into more iffy territory with CPI and PPI data – along with the Philly and NY Fed Reports, Industrial Production and Consumer Sentiment. Powell is likely to say the Fed is going to be data-dependent and that’s exactly the kind of data he’s talking about.
With oil back below $82.50 (33% off the Q1 highs) for the first time since January, CPI and PPI should be improving nicely and that, in turn, will hopefully be making consumers happier too, which, in turn, should make the market happy while giving the Fed no reason to hit us hard with another 0.75 increase at the Sept 21st meeting, which would make the markets even happier.
Keep in mind we’re already at 2.25% and let’s say the Fed is looking for 4% by March. There are meetings on Sep 21st, Nov 2nd, Dec 14th, Feb 1st and March 22nd – 5 meetings to raise 1.75% so, IF the Fed were to raise by 0.75% at this meeting – they would be forced to only raise 0.25% at the next meeting – and that would make them look silly. If they raise 0.5% at the Nov meeting, we’d be at 3.5% with 3 more meetings into March and one of them would have to be 0% which, again, would make them look indecisive.
So the only logical move for the Fed on the 21st is to go with a 0.5% rate hike and reiterate how data-dependent they will be going forward so they can do anything between 0.25 and 0.75% at the Nov meeting without looking like they’ve lost control.
Let’s keep in mind, by the way, that this 0.75% rate hike by the ECB only takes them to 1.25% (1% behind our Fed, who is hiking more today) and that’s a big jump from 0.5% but it should be enough to keep the Euro over $1 – which is what we expected them to do.
With inflationary pressures persisting, the ECB staff has “significantly revised up their inflation projections.” They now expect it to average 8.1% in 2022 (vs. 6.8% previously), 5.5% in 2023 (vs. prior view of 2.8%) and 2.3% in 2024 (unchanged). The ECB staff reduced their economic growth projections for 2023 and 2024. They now see real annual GDP growth of 3.1% in 2022 (vs. 2.8% in June), 0.9% in 2023 (vs. 2.1%), and 1.9% in 2024 (vs. 2.1%) – that will put a damper on the markets this morning.
9:15 Update: Powell is doing more of an interview with Q&A and it remains to be seen how it goes. He’s sticking with “no easing” but won’t commit one way or the other on what the next hike will be so we’ll have to see how the day goes.
“We are strongly committed to this project and we will keep at it until we get the job done,” he added.
The inflation of the 1970s and early ’80s “followed several failed attempts to bring inflation under control,” and that led people to assume that high inflation was the norm, Powell explained. In other words, history has taught today’s policymakers not to loosen policy too early.
“Today, demand continues to be very strong, he said. “What we hope to achieve is a period of growth below trend” that will bring labor market back into balance, Powell said. “The shock to the labor supply that we got from the pandemic was large and persistent.” The increase in labor force participation that was seen in August’s jobs report was welcome, but it’s still a percentage point below prepandemic levels.
So far the S&P Futures topped out just under 4,000 but all the way back to 3,956 now so, if that was a test – we failed it!
