Recovering ahead of the Fed

Another volatile session in store in financial markets as we await the next move from the Fed amid rising expectations of a dovish pivot to close out the year.

While a 75 basis point hike looks locked in tomorrow, the messaging is what investors are interested in. Despite inflation remaining at eye-watering levels, there’s a growing belief that the central bank will signal a desire to ease off the brake over the following few meetings starting with a 50bps hike in December.

It may come too late to avoid a recession but the Fed has been very clear from the start that while a soft landing is the desirable and attainable outcome, getting inflation under control is the primary focus. The question is whether the central bank believes its efforts will achieve that or if more needs to be done.

With the economy weakening, earnings not impressing and yield curves inverting – signaling an incoming recession – many now believe the risks of aggressive tightening are greater than a more gradual approach. The economy has a lot of tightening to absorb once rates likely hit the 3.75-4% range this week.

A dovish signal could be an exciting moment for equity investors, one they’ve craved all year, but that doesn’t mean it’ll be plain sailing from here. There’s still the economic drop-off and potential global recession to contend with, not to mention a highly uncertain winter in Europe.

RBA continues its slower tightening

The RBA got the ball rolling on slower rate hikes last month when it made the decision to only increase the cash rate by 25 basis points and it took a similar decision this morning. The cash rate now stands at 2.85% and is expected to rise further. But with growth slowing and unemployment expected to rise, smaller increments allow the RBA to avoid overtightening at a cost to the economy. That said, inflation is far from under control which is the balancing act that all central banks will have to eventually face.

BP’s bumper results

BP announced a further $2.5 billion share buyback this morning after reporting another phenomenal quarter of earnings. Profit in the third quarter fell only a little shy of the $8.5 billion in Q2 but well up on last year and massively exceeding expectations ($8.3bn vs $6bn). This isn’t going to ease calls for windfall taxes at a time when governments are facing fiscal black holes requiring difficult decisions on taxation and spending. Finding the right balance between taxing “excess profits” as a result of the war in Ukraine without deterring investment won’t be easy, especially when the politics of it all is taken into consideration.

China’s PMI surprise

The Caixin manufacturing PMI came as a pleasant surprise considering what we saw in the official PMI data on Monday. The reading, which typically covers smaller private firms, improved from September despite remaining in contraction territory. That said, it doesn’t make me any more optimistic about the outlook considering ongoing domestic headwinds as a result of zero-Covid and property market woes, not to mention the deteriorating global growth prospects.

Bitcoin waiting on the Fed

Bitcoin is unwinding the bulk of Monday’s losses amid a rebound in risk assets. The cryptocurrency broke back above $20,000 last week, spurring some hope that a broader recovery could be on the cards if the Fed can deliver the dovish message so many seemingly want to hear. As it stands though, it remains largely within the range it has since the middle of August when it has fluctuated around $20,000, with breaks on either side not leading to substantial swings one way or another. Could the Fed change that?

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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