Just when we thought it was safe to go out and play, the Fed is back with rate hike speak again.
Fed President Bowman said on the weekend that more rate hikes are likely required. Then, yesterday, Fed President Williams said rates are probably about right, but could rise.
Fed President Williams comments are in line with our long-held forecast that rates will now be on hold for 6-12 months. However, even Williams went out of his way to state this certainly did not mean rate cuts. Further rate hikes are not out of the question.
It is clear the Federal Reserve is going to keep up its pressure on market and economic expectations to further moderate activity. It is doing this by maintaining rates at these recently elevated levels for as far as the eye can see, and by upping the ante a little in terms of messaging.
The Fed is making it all too clear now that rate cuts are a non-starter. Just as we said would be the case. Also, that further rate hikes are indeed possible depending upon the trajectory of inflation from here.
This is important as expectations for this Thursday’s inflation report are already well established in terms of some degree of re-acceleration. From 3.0% to 3.3% for the annual rate. Monthly headline and core data could be even more worrisome.
Furthermore, his week’s data will not include some recent developments. Natural gas and wheat prices are seeing significant upward movement again. The Fed is also well aware that global oil prices have rallied significantly and at best will consolidate here. Further upside risk is clear however as Europe and the US move toward winter.
In a nutshell, inflation is likely to accelerate in this week’s data and there is more pressure in the pipeline already. With services and wages remaining very serious concerns for the Fed this renewal of commodity price pressures will indeed keep the ‘further rate hikes required’ conversation a rather lively one indeed.
The market has already shown it can rally in the face of rate hikes. The concern I have had in recent weeks is that that rally may have run its natural course for the time being. We are certainly seeing a significant correction phase at the moment. The market rallied as a bounce to recent declines on the day, and this was to be expected, but sideways rather than up could be the name of the game for the moment.
Berkshire helped carry the market higher. It hit a new record high, just, and so the next day or two will determine whether such a move can be sustained. Meanwhile, Apple continued to crash. Now down 10% from its peak. This is a clear example of what happens when share buybacks stop just as reality begins to bite. There could be more of the big names due just such an experience soon. Though the other techs seem to be settling into a more sideways pattern.
Overall, I would still suggest caution. Please note, yet another low for the SP500, especially after the Berkshire spike, would again implement renewed and sustained selling pressure.
Market commentary and analysis from Clifford Bennett, chief economist at ACY Securities
