Fed React: Stocks volatile on Fed downshift hints, ADP impresses, Maersk and Global Trade, Oil extends rally post-Fed, Gold gains, Bitcoin still above $20k

US stocks initially popped after the Fed provided enough hints that the end of the Fed tightening cycle is nearing. Stocks could not hold up their gains as Fed Chair Powell reminded markets that inflation has been high for 18 months and that it is too early to think about pausing rate hikes. Stocks might struggle here as the risk of the Fed taking rates above 5.00% are clearly still on the table.

FOMC

At first glance, it was looking like Christmas might have come early for Wall Street as the Fed hinted they are getting close to downshifting to a slower pace of tightening.  Fed fund futures were initially more confident that December will be a half-point rate rise. 

The Fed delivered a fourth consecutive 75 basis points rate rise, which brought the benchmark federal funds rate to a range of 3.75% and 4.00%.  The total of rate hikes for the year is now at 375 bps and they probably have a couple more rate increases in mind. 

The dovish part of the statement was that the Fed will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

The hawkish part of the statement was that they anticipate that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

The Fed remains data-dependent and that should suggest that if both the next couple of inflation readings (November 10^th and December 13^th) and nonfarm payroll reports (November 4^th and December 2^nd) remain hot, they will remain aggressive with taking policy further into restrictive territory. 

Press Conference

Powell reiterated their strong commitment to bringing down inflation. Without price stability, we will not achieve a sustained strong labor market. Powell was clear in signaling that a downshift will either happen in December or February.  But he avoided becoming too dovish as he reminded traders that it is very premature to thank about pausing rate hikes.

ADP

Wall Street is not putting a lot of weight on the ADP report as this is only the third month using its new methodology.  The ADP report showed private sector job growth remains strong, led by medium-size companies.  The headline ADP job growth number was higher than forecasts and served as another reminder that the labor market remains robust.  Hiring in the private sector rose by 239,000 jobs, better than the forecast of 185,000 and the downwardly revised prior reading of 192,000. 

ADP’s Chief Economist said, “While we’re seeing early signs of Fed-driven demand destruction, it’s affecting only certain sectors of the labor market.”

It seems all the employment data points suggest this labor market refuses to break. Job momentum will spell trouble for traders expecting the Fed to convincingly signal they will downshift to a slower pace of tightening in December. 

Maersk

Global trade is quickly softening according to the world’s largest owner of shipping containers. For 2022, Maersk expects global container demand to fall as much as 4% year-over-year, while the outlook for next year is broadly flat to negative.  Maersk noted that freight rates have peaked and started to normalize during the quarter, driven by both decreasing demand and easing of supply chain congestion.

Global recessionary fears are intensifying and that should spell trouble for global transportation and logistics demand. Demand destruction is helping container rates come back down to earth and they probably will continue to soften. 

Oil

Crude prices held onto earlier gains after the EIA crude oil inventory report showed energy traders that this market is not quite ready to tip into a surplus.  The headline draw of 3.11 million bpd was more than expected but not as large as the 6.53 million bpd draw the API posted last night. There are signs that crude demand destruction is happening as exports tumble and gasoline demand comes in a little soft. Still, there remain supply risks on the table and that should keep this market tight for a while longer.   

Gasoline inventories declined more than expected and hit the lowest levels since November 2014.  Prior to the EIA report, gas prices surged.

Oil prices got a boost after the Fed signaled their aggressive rate hiking cycle could be nearing an end.  The risk of the Fed remaining aggressive with tightening and sending this economy quickly into a severe recession is easing. The dollar could weaken further here and that should be good news for commodities broadly. 

FX

The dollar initially weakened and that trend could continue if the Fed is convinced that inflation is easing.  For the dollar decline to accelerate, Wall Street needs to see softer labor and inflation numbers. 

Gold

Gold is trying to get its groove back and that could happen if the next labor market report and inflation data shows weakness. The FOMC decision affirmed the Fed’s data dependency which means gold traders are a couple of soft labor and inflation readings before it can make a strong move above the $1700 level. 

Cryptos

Bitcoin continues to trade above the $20,000 level as the Fed has confirmed what markets were hoping for; A downshift in tightening is coming. The initial Fed reaction was rather strong for most risky assets, but it was not sustained as the central bank will remain dependent on the next round of inflation data.  Inflation has been high for 18 months and the Fed will remain committed to using its tools, which means we won’t get a greenlight for risky assets until inflation is dropping sharply.     

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.