October 24, 2022 | Allio’s Chief Investment Officer, Raymond Micaletti, discusses the Fed soothing the market, and its next move.
On July 14, one day after the June CPI came in higher than expected, the U.S. equity market looked poised to revisit its mid-June lows. The S&P 500 was at 3723 and palpably without support (just 2% off its June trough).
The market was in the midst of convincing itself the Fed would hike 100 bps at its late-July meeting and the Fed was one day away from a blackout period in the run-up to that meeting.
But on that day, Fed governors Waller and Bullard came out and assuaged the market’s concerns about the pace of Fed rate hikes.
Waller said, “You don’t want to overdo rate increases… The market is getting ahead of itself with 100 bps.” Bullard said, “I advocate a 75 bps increase at the next meeting.”
The market took those soothing words as evidence of a Fed pivot and embarked on an 18% rally off the June lows into mid-August.
Flash forward to last Friday. Interest rates were becoming unhinged, SNAP had reported poor earnings that were weighing on mega-cap tech (e.g., GOOGL, META), and the market again looked poised to roll over toward its mid-October low (S&P 500 futures were down 1% premarket on an option expiration Friday).
As in July, the Fed was one day away from its blackout period before its early November meeting.
Last week we speculated the Fed had a window of opportunity to ease its rhetoric. A too-hawkish Fed risked breaking something before it would be able to reach its target Fed funds rate; the Fed likely wouldn’t want to be seen as crashing the markets into a midterm election. And going full-bore hawkish into a blackout period ran the risk of destabilizing the market.
With respect to the last point, we wrote:
“…the Fed will go into a two-week blackout period leading up to the FOMC meeting on November 2. Will the Fed want to leave the market teetering on the abyss and left to its own devices for two weeks without being able to jawbone it into stability if things start breaking?”
Apparently, the answer to that question was “No.”
At 8:13 am ET on Friday, the WSJ’s Fed whisperer, Nick Timiraos, dropped a story saying the Fed will hike by 75 bps in November, but then start debating the size of future rate hikes.
At noon, non-voting San Francisco Fed president, Mary Daly, came out with additional dovish language regarding a need to “step down the hikes” to 50 or 25 bps and mentioned the Fed needs to be cognizant of the global tightening that has already taken place.
Risk assets welcomed the softening in rhetoric, with the S&P 500 finishing more than 3% off its premarket lows. The Fed saved the day again.
It’s unclear whether this rhetoric has intermediate-term repercussions. It may be that the Fed wants stable markets until its next meeting on November 2 (or through the midterms on November 8). And if equity markets are higher at that time, it may feel obliged to talk them down again. In other words, the Fed might just be buying time.
In the interim, the biggest influence on the market will be mega-cap tech earnings. This week GOOGL, META, MSFT, AMZN, and AAPL report. It’s reasonable to believe if those earnings are better than expected, the market may continue to drift higher (and vice versa).
We also get a first look at Q3 GDP this week. The Atlanta Fed GDPNow estimate is 2.9%.
In the bigger picture, the Fed’s apparent concern about market stability suggests it will act (if necessary) to keep the U.S. Treasury market from seizing up. Given the wild intraday moves in yields we’ve been seeing, a seizing up of the Treasury market is not far-fetched.
But the Fed’s strategic utterances on Friday may have forestalled that potential day of reckoning for at least a few more weeks.