What’s next for markets now that the Federal Reserve has delivered its fourth and possibly final jumbo rate increase of 75 basis points?
Well, a lot, actually.
A sometimes tumultuous third-quarter earnings season isn’t over yet. A packed economic-data calendar in the coming weeks includes key readings on inflation and the labor market. On top of that, the U.S. midterm elections could result in Democrats losing control of one, or both, chambers of Congress.
MarketWatch spoke with several market gurus about what investors should watch out for, and what it all might mean for their portfolios.
Inflation, jobs data could force the Fed to keep rates ‘higher for longer’
The Fed may be penciling in another rate increase of 50 basis points at its December meeting, but any sign that inflation isn’t trending toward the central bank’s target still could send stocks reeling and Treasury yields surging, market strategists said.
Indeed, stocks initially rallied after the Fed’s Wednesday policy statement signaled a slower pace of rate increases was in the offing. But indexes ended the day down sharply after Chairman Jerome Powell, in his news conference, said it was premature to “pause” rate hikes and that the terminal — or peak — interest rate was likely to be higher than policy makers had anticipated in September.
Although headline inflation has softened from the fastest pace in more than 40 years, core prices are still accelerating at an uncomfortable rate, and wage growth remains a “mixed bag,” Powell said.
“A lot of what the Fed ultimately does will depend on what happens with inflation,” said Jack Ablin, founding partner and chief investment officer at Cresset Capital.
The consumer-price index for October is due out on Nov. 10, followed by the personal-consumption expenditures index, the Fed’s preferred barometer of inflation pressures, on Dec. 1.
But there’s still plenty to learn about inflation from the October jobs report due out Friday, including its reading on average hourly earnings.
“I think certainly the payrolls number is important, and it all circles back to what it means for inflation,” Ablin said.
Bottom line: Any further indication that the Fed will need to keep interest rates “higher for longer” to combat inflation could exacerbate the weakness in both stocks and bond prices, which move inversely to yields, seen so far this year.
“The increased momentum of inflation sets a high bar for the Fed to end the current rate hike cycle and an even higher one to begin cutting rates,” said Bill Adams, chief economist for Comerica Bank.
Midterms and the return of gridlock
Even if Democrats manage to hang on to both chambers of Congress, investors will likely breath a sigh of relief once Tuesday’s U.S. midterm elections have ended.
“We frequently see stocks rally after the election no matter what the outcome is,” said Callie Cox, U.S. investment analyst at eToro.
Some investors think Republicans retaking the House or the Senate could be bullish for stocks, said Octavio Marenzi, CEO of markets-focused management consulting firm Opimas.
According to Marenzi, a divided Congress would likely lead to more gridlock, which in turn would mean less inherently inflationary fiscal spending.
“Markets might look favorably on a Republican takeover of at least one of the houses [of Congress],” he said.
Earnings remain important
Corporate earnings growth has held up surprisingly well so far this year despite the drumbeat of guidance cuts and ominous rhetoric from corporate executives, said eToro’s Cox.
But the third-quarter earnings season isn’t over yet, which can mean more unpleasant surprises, like what investors saw when Alphabet Inc.
Meta Platforms Inc.
and Amazon.com Inc.
reported earnings last week.
Investors are still waiting on earnings from more than 150 S&P 500 companies, according to FactSet. Beyond that, there’s also the risk that earnings guidance cuts could weigh on equity prices, market strategists said.
Morgan Stanley Chief U.S. Equity Strategist and Chief Investment Officer Michael Wilson said in recent weeks that guidance cuts may not arrive until companies report fourth-quarter earnings early next year, if at all.
Right now, the S&P 500 is expected to achieve full-year earnings growth of 5.6% in 2022, and 3.9% in 2023, according to Sam Stovall, chief investment strategist at CFRA. That has come down slightly since Sept. 30, when investors anticipated full-year growth of 6.3% and 7%.
A Russian winter offensive could complicate the outlook for markets
The Ukrainian military lately has succeeded in keeping Russian forces at bay. But that could change if Russia launches a winter offensive, according to Marenzi.
Russia already has been calling up thousands of troops and preparing to send them to the front lines.
Historically speaking “winter has been their friend,” Marenzi said about the Russian military. “And I think it might end up being their friend again.”
A Russian advance in Ukraine would likely hurt risky assets like stocks, Marenzi said, while benefiting traditional havens like the dollar, Treasurys and gold
Speaking of stocks, the major U.S. indexes finished Wednesday sharply lower after a volatile session.
The Dow Jones Industrial Average
tumbled 505 points, or 1.6%, to end at 32,147.76 after briefly topping 33,071 at the session’s high, according to FactSet. The S&P 500 index
fell 2.5% and the Nasdaq Composite Index
closed 3.4% lower, the biggest daily drop for both indexes since Oct. 7.
also climbed after experiencing similar levels of volatility. The yield on the 2-year note rose 3 basis points to 4.568% based on 3 p.m. Eastern Time levels, its highest level in two weeks.
Global National: Dec. 7, 2022 | Bank of Canada hikes key interest rate to 4.25% – Global News
Bank of Canada increases policy interest rate by 50 basis points, continues quantitative tightening
The Bank of Canada today increased its target for the overnight rate to 4¼%, with the Bank Rate at 4½% and the deposit rate at 4¼%. The Bank is also continuing its policy of quantitative tightening.
Inflation around the world remains high and broadly based. Global economic growth is slowing, although it is proving more resilient than was expected at the time of the October Monetary Policy Report (MPR). In the United States, the economy is weakening but consumption continues to be solid and the labour market remains overheated. The gradual easing of global supply bottlenecks continues, although further progress could be disrupted by geopolitical events.
In Canada, GDP growth in the third quarter was stronger than expected, and the economy continued to operate in excess demand. Canada’s labour market remains tight, with unemployment near historic lows. While commodity exports have been strong, there is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter, and housing market activity continues to decline. Overall, the data since the October MPR support the Bank’s outlook that growth will essentially stall through the end of this year and the first half of next year.
CPI inflation remained at 6.9% in October, with many of the goods and services Canadians regularly buy showing large price increases. Measures of core inflation remain around 5%. Three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum. However, inflation is still too high and short-term inflation expectations remain elevated. The longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched.
Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target. Governing Council continues to assess how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate. We are resolute in our commitment to achieving the 2% inflation target and restoring price stability for Canadians.
The next scheduled date for announcing the overnight rate target is January 25, 2023. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.
U.S. Crude Oil Inventories Continue To Crash, While Products Build – OilPrice.com
Crude oil inventories dropped for the fourth week in a row this week, by 6.426 million barrels, American Petroleum Institute (API) data showed on Tuesday, after dropping 7.85 million barrels in the week prior. Analysts anticipated a 3.884 million barrel draw.
U.S. crude inventories have grown by just 6 million barrels so far this year, according to API data. Meanwhile, crude stored in the nation’s Strategic Petroleum Reserves sunk by nearly 32 times that figure so far this year— by 206 million barrels.
The SPR now contains the least amount of crude oil since February 1984.
The draw in commercial crude oil inventories came as the Department of Energy released 2.1 million barrels from the Strategic Petroleum Reserves in the week ending December 2, leaving the SPR with just 387 million barrels.
In the week prior, the API reported a large draw in crude oil inventories of 7.85 million barrels.
WTI prices fell sharply on Tuesday as the market reacted to the weak G7 price cap on Russian crude and the status quo from the OPEC+ meeting earlier in the week that ended without a production cut as some had feared.
At 3:51 p.m. EST, WTI was trading down $2.50 (-3.25%) on the day at $74.43 per barrel. This is a decrease of roughly $4.50 per barrel from the prior week. Brent crude was trading down $3.04 (-3.69%) on the day at $79.64—a decrease of roughly $5.50 per barrel on the week.
U.S. crude oil production again stayed at 12.1 million bpd for the fourth week in a row for week ending November 25, 400,000 bpd more than the levels seen at the start of the year, and still a 1 million bpd shortfall from the levels seen at the start of the pandemic.
The API reported a build in gasoline inventories this week of 5.93 million barrels for the week ending December 2, on top of the previous week’s 2.85-million-barrel build.
Distillate stocks also saw a build this week, of 3.55 million barrels, on top of last week’s 4.01-million-barrel increase.
Cushing inventories rose by 30,000 barrels in the week to December 2, compared to last week’s reported decrease of 150,000 barrels.
WTI was trading at $74.32 shortly after the data release.
By Julianne Geiger for Oilprice.com
More Top Reads From Oilprice.com:
Julianne Geiger is a veteran editor, writer and researcher for Oilprice.com, and a member of the Creative Professionals Networking Group.
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