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Federal Reserve Chairman Jerome Powell has the power to make or break the markets these days. On Wednesday, he chose to disappoint.
What’s happening: The central bank announced its fourth consecutive three-quarter percentage point hike in interest rates, continuing its aggressive and unprecedented campaign to tame inflation.
What investors focused on, however, were Powell’s comments about where interest rates could peak — and how long they could stay there before the Fed changes course.
“The question of when to moderate the pace of increases is now much less important than the question of how far to raise rates and how long to maintain tight monetary policy,” Powell told reporters. The Fed, he said, “could move to higher levels than we thought.”
This is forcing the market to recalibrate, undermining hopes that a meaningful political pivot could soon occur.
The backdrop: Given how far the Fed has already gone — and an expectation it wouldn’t want to exceed, since rate hikes take time to trickle down to the economy — U.S. stocks surged in October . The Dow Jones rose 14%, posting its best monthly gain since January 1976.
This huge surge now seems to have been very premature.
The S&P 500 fell 2.5% on Wednesday, while the Dow lost more than 500 points, losing 1.6%. Global stock markets continued to fall on Thursday.
Meanwhile, the US dollar has risen and government bond yields – which move opposite to prices – have climbed. The US 2-year yield is now at its highest level since 2007.
“What we saw was a more hawkish message than markets had anticipated,” Laura Cooper, senior macro-investment strategist at BlackRock, told me. “Essentially it killed the pivot dreams.”
Economic data, particularly for the labor market, still looks relatively strong. US job openings rose unexpectedly in September, with 1.9 for every available worker. Friday’s latest jobs report is expected to show the economy added another 200,000 jobs in October – down from last month, but still a very solid number.
Powell said “data received since our last meeting suggests that the ultimate level of interest rates will be higher than expected.”
Guillaume Menuet, head of investment strategy and economics at Citi Private Bank in Europe, the Middle East and Africa, said the recent stock market jump “clearly has the characteristics of a bearish rally.” .
It was built in part, he told me, on “the mistaken expectation of an imminent Fed pivot.” This week the revival has come.
When Google – the giant of the digital advertising industry – signals that the business climate is deteriorating, investors sit up and pay attention.
But it’s not the only company to be hit by lower spending as businesses pull back in anticipation of a global recession.
“The big advertisers we traditionally get spend from aren’t spending this quarter,” Roku (ROKU) CEO Anthony Wood told analysts after the company announced its results on Wednesday. “They don’t spend with anyone.”
Roku shares fell 19% in premarket trading on Thursday after the streaming hardware maker said it expects fourth-quarter revenue to decline as the economic climate weighs on consumer spending and pushing advertisers to reduce their budgets.
“We expect these conditions to be temporary, but it is difficult to predict when they will stabilize or rebound,” he said in a letter to shareholders.
Bottom Line: Last year, businesses rushed to capitalize on a post-lockdown spending spree over the holidays. The biggest problem was getting enough merchandise on the shelves. But advertisers say this year will be different.
“This holiday season, given the unique set of environments and features, will likely be different from the typical holiday season,” Wood said.
There are signs that supply chains are finally getting back to normal.
See it here: The Global Supply Chain Strain Index concocted by the Federal Reserve Bank of New York has been down sharply since April. Shipping giant Maersk said this week that container shipping rates began to decline towards the end of the last quarter “due to weakening customer demand, coupled with markets beginning to normalize with less supply chain disruption” and less congestion.
But companies are not out of the woods yet. They are still struggling with backlogs that are weighing on sales.
Ford saw October U.S. sales fall 10% from a year ago as the company continued to grapple with supply chain challenges. It said on Wednesday it sold 158,327 vehicles last month, up from nearly 176,000 vehicles in the same period last year.
Remember: the company said in September that it couldn’t finish assembling 40,000 to 45,000 large SUVs and pickup trucks because it didn’t have all the necessary parts.
In March, the company announced that it would ship some vehicles without less crucial computer chips and add them later. Shortages and the rising cost of supplies increased Ford’s spending by about $1 billion in the third quarter.
My takeaway: Supply chains are complicated and messy, and positive developments won’t trickle down to the system overnight. We are not there yet.