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Federal Reserve Chairman Jerome Powell has the power to make or break markets these days. On Wednesday he decided to disappoint.
What’s Happening: The central bank announced its fourth consecutive three-quarter percentage point hike in interest rates, continuing its aggressive and unprecedented campaign to keep inflation in check.
What investors honed on, however, were Powell’s comments about where interest rates might peak and how long they might stay there before the Fed changes course.
“The question of when to moderate the pace of hikes is now far less important than the question of how high to raise rates and how long to keep monetary policy tight,” Powell told reporters. The Fed, he said, “could move to higher levels than we thought.”
This is causing the market to recalibrate, denting hopes that a major political pivot will arrive soon.
Background: Given how tough the Fed has already gone – and an expectation it doesn’t want to exceed, as rate hikes take time to fuel the economy – US equities jumped in October. The Dow was up 14%, posting its best monthly earnings since January 1976.
This huge run-up now appears to have been very premature.
The S&P 500 fell 2.5% on Wednesday, while the Dow fell more than 500 points, losing 1.6%. Global equity markets continued to decline on Thursday.
Meanwhile, the US dollar has risen and government bond yields, which move in opposite prices, have risen. The yield on the 2-year US banknote is now at its highest level since 2007.
“What we saw was a more aggressive message than the markets had anticipated,” Laura Cooper, BlackRock’s senior macro investment strategist, told me. “Essentially, it killed pivot dreams.”
Economic data, especially for the labor market, still looks relatively solid. Job openings in the United States increased unexpectedly in September, with 1.9 for every worker available. Friday’s latest employment report is expected to show the economy added another 200,000 positions in October, down from last month, but it’s still a very solid number.
Powell said that “the incoming data from our last meeting suggests that the final level of interest rates will be higher than 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 “erroneous expectation of an imminent Fed pivot.” This week the alarm went off.
When Google, the digital advertising giant, signals that the business climate is deteriorating, investors stand up and pay attention.
But it is not the only company to suffer from the reduction in spending as companies retire in anticipation of a global recession.
“The large advertisers that we traditionally receive expenses from are not spending this quarter,” Anthony Wood, CEO of Roku (ROKU), told analysts after the company reported earnings on Wednesday. “They aren’t spending on anyone.”
Roku shares fell 19% in pre-market trading on Thursday after the streaming hardware maker said it expects revenue to decline in the fourth quarter as the economic climate weighs on consumer spending and pushes advertisers to cut back. your budgets.
“We expect these conditions to be temporary, but it is difficult to predict when they will stabilize or recover,” reads a letter to shareholders.
The takeaway: Last year, companies were racing to capitalize on a spate of post-lockout spending during the holidays. The biggest problem was putting enough merchandise on the shelves. But advertisers are making it clear that this year will look different.
“This holiday season, given the unique set of environments and features, is likely to be different from the typical holiday season,” Wood said.
There are signs that supply chains are finally returning to normal.
See here: The Global Supply Chain Pressure Index compiled by the Federal Reserve Bank of New York has been falling sharply since April. Shipping giant Maersk said this week that container shipping rates began to decline towards the end of last quarter “due to weakening customer demand, coupled with the fact that markets begin to normalize with fewer outages. supply chain “and less congestion.
But companies aren’t out of the woods yet. They still have to deal with arrears weighing on sales.
Ford has seen its October US sales plummet 10% over the past year as the company continued to battle supply chain difficulties. Wednesday said it sold 158,327 vehicles last month, down from nearly 176,000 vehicles in the same period last year.
Remember: The company said in September that it couldn’t finish assembling between 40,000 and 45,000 large SUVs and pickups, as it didn’t have all the necessary parts.
In March, the company said it would ship some vehicles without some less crucial computer chips and add them later. The shortage and rising cost of supplies increased Ford’s expenses by approximately $ 1 billion in the third quarter.
My takeaway: Supply chains are complicated and messy, and positive developments won’t fuel the system overnight. We’re not there yet.