Stocks fell as data showed continued labor-market strength, with investors waiting to hear from Federal Reserve Chair Jerome Powell on whether it would be realistic to expect a slowdown in the pace of rate hikes going forward.
(Bloomberg) — Stocks fell as data showed continued labor-market strength, with investors waiting to hear from Federal Reserve Chair Jerome Powell on whether it would be realistic to expect a slowdown in the pace of rate hikes going forward.
The pronounced sense of caution was reflected in the S&P 500’s swings Wednesday — with the gauge currently on track for its narrowest range this year. While the tech-heavy Nasdaq 100 underperformed, chipmakers bucked that trend on strong results from Advanced Micro Devices Inc. Boeing Co. also climbed after its chief’s bullish cash outlook.
Two-year US yields — which are more sensitive to imminent Fed moves — were little changed. The Treasury halted the longest string of cutbacks to its quarterly sales of longer-term debt in about eight years, showcasing the end of a period of historic reduction in the fiscal deficit.
The Fed is expected to raise rates by 75 basis points, extending its most aggressive tightening campaign since the 1980s. The decision will be announced at 2 p.m. in Washington and Powell will hold a press conference 30 minutes later. He may emphasize policymakers remain steadfast in their inflation fight, while leaving options open for their December gathering.
“Markets want clarity on where the Fed will at least pause the current rate hike cycle, but Chair Powell is not really in any position to provide that just yet,” said Nicholas Colas, co-founder of DataTrek Research. “For every sign the US economy is slowing (housing, commodity prices, retail sales ex-inflation) there are others that say labor market conditions remain strong.”
Hiring at US companies rose in October by more than forecast, according to data from ADP Research Institute in collaboration with Stanford Digital Economy Lab. To Jeffrey Roach at LPL Financial, “a tight labor market and rising wages will complicate things for the Fed, and the risk is the labor market could remain tight for quite some time.”
A survey conducted by 22V Research showed that 47% of respondents believe that the Fed meeting and Powell’s conference will be “risk off.” That’s up from 22% last week. “We DO NOT expect Powell to be dovish, he just doesn’t need to surprise on the hawkish side, relative to what is priced,” wrote founder Dennis DeBusschere.
Given the market rally in October, a less hawkish Fed might not be able to support the recovery significantly further, according to Fawad Razaqzada at City Index and Forex.com. The bigger risk in his view is that the central bank disappoints traders looking for a downshift, which could create “a fresh wave of risk selling.”
“Therefore, if you are bullish or long, take extra care here,” Razaqzada added. “If you are bearish, then there might be tactical shorting opportunities to take advantage of again, especially if the Fed delivers a hawkish surprise today.”
In fact, the recent rally in the S&P 500 has left traders with little conviction as to what will happen next.
While many closed out their put contracts during the rebound, they didn’t gorge on calls in the expectation that the gains would continue, based on the cost of bearish options versus bullish ones analyzed by SpotGamma. While there have been bets on moves in either direction, a big chunk of the crowd is willing to wait until it hears the Fed’s actual message — even if that leads to near-term pain.
Read: El-Erian Sees Danger That Fed Will Do ‘Too Little’ on Inflation
Inflation is too high at the moment for the Fed to start hinting at loosening financial conditions, making the stock market’s recent optimism “misplaced,” according to Barclays Plc strategists. The narrative for a pivot is “overblown,” strategists led by Emmanuel Cau wrote.
Meantime, a key indicator of US stocks is close to flashing a “buy” signal, supporting bulls who have pushed equities higher in the run-up to the Fed meeting.
Bank of America Corp.’s so-called Sell Side Indicator — a measure of Wall Street sentiment on stocks — is at its lowest level since 2017. Such levels typically trigger rallies, with 12-month returns for the benchmark S&P 500 positive for 94% of the time, strategists including Savita Subramanian wrote in a note dated Nov. 1.
In other corporate news, a rally in US-listed Chinese stocks went unabated on Wednesday after health authorities said the nation will stick to its Covid Zero policy. Separately, China has ordered a seven-day lockdown of the area around Foxconn Technology Group’s main plant in Zhengzhou, a move that will severely curtail shipments in and out of the world’s largest iPhone factory.
Key events this week:
- Bank of England rate decision, Thursday
- US factory orders, durable goods, trade, initial jobless claims, ISM services index, Thursday
- ECB President Christine Lagarde speaks, Thursday
- US nonfarm payrolls, unemployment, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.6% as of 11:22 a.m. New York time
- The Nasdaq 100 fell 0.9%
- The Dow Jones Industrial Average fell 0.2%
- The Stoxx Europe 600 fell 0.3%
- The MSCI World index fell 0.3%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $0.9873
- The British pound was little changed at $1.1474
- The Japanese yen rose 0.8% to 147.09 per dollar
Cryptocurrencies
- Bitcoin fell 0.3% to $20,414.35
- Ether fell 1.2% to $1,557.03
Bonds
- The yield on 10-year Treasuries was little changed at 4.04%
- Germany’s 10-year yield was little changed at 2.13%
- Britain’s 10-year yield declined five basis points to 3.42%
Commodities
- West Texas Intermediate crude rose 1.4% to $89.62 a barrel
- Gold futures were little changed
–With assistance from Lu Wang, Vildana Hajric, Isabelle Lee and Emily Graffeo.
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