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Federal Reserve Chairman Jerome Powell has the power to make or break markets these days. On Wednesday, he chose to disappoint.
What’s happening: The central bank announced its fourth straight rate hike of three-quarters of a percentage point, continuing its aggressive and unprecedented campaign to bring inflation under control.
What investors caught, however, were Powell’s comments about where interest rates might peak — and how long they might stay there before the Fed changes course.
“The question of when to moderate the pace of hikes is now much less important than the question of how high to raise interest rates and how long to keep monetary policy tight,” Powell told reporters. The Fed, he said, “may be moving higher than we thought.”
This is causing the market to recalibrate, dampening hopes that a meaningful policy pivot could come soon.
The backdrop: Given how hard the Fed has already moved — and an expectation it wouldn’t want to exceed, as rate hikes take time to fuel the economy — U.S. stocks rallied in October. The Dow rose 14%, its best monthly gain since January 1976.
This huge march now seems to have been too premature.
The S&P 500 sank 2.5% on Wednesday, while the Dow shed more than 500 points, falling 1.6%. Global stock markets continued to fall on Thursday.
Meanwhile, the US dollar rose and government bond yields — which move inversely to prices — rose. The yield on the 2-year US note is now at its highest level since 2007.
“What we saw was a more hawkish signal than the markets expected,” Laura Cooper, senior macro investment strategist at BlackRock, told me. “Essentially, it killed the core dreams.”
Economic data, particularly on the labor market, continues to look relatively strong. US jobs rose unexpectedly in September, by 1.9 for every available worker. The latest jobs report on Friday 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 that “incoming data from our last meeting suggests that the final level of interest rates will be higher than previously expected.”
Guillaume Menuet, Citi Private Bank’s head of investment strategy and economics in Europe, the Middle East and Africa, said the recent rally in the stock market “clearly has the characteristics of a bear market rally”.
It was built in part, he told me, on “the misguided expectation of an imminent Fed pivot.” This week the wake-up call arrived.
When Google — the behemoth of the digital ad industry — signals that the business climate is deteriorating, investors sit up and take notice.
But it’s not the only company affected by lower spending, as companies cut back in anticipation of a global recession.
“The big advertisers that we traditionally get spend from are not spending this quarter,” Roku ( ROKU ) CEO Anthony Wood told analysts after the company’s earnings call on Wednesday. “They don’t spend with anyone.”
Shares of Roku fell 19% in premarket trading Thursday after the streaming maker said it expects revenue to fall in the fourth quarter as the economic climate weighs on consumer spending and prompts advertisers to cut budgets.
“We expect these conditions to be temporary, but it is difficult to predict when they will stabilize or recover,” it said in a letter to shareholders.
The scenario: Last year, companies struggled to capitalize on a post-lockdown spending surge during the holidays. The biggest problem was getting enough merchandise on the shelves. But advertisers make it clear that this year will be different.
“This holiday season, given its unique set of environments and characteristics, will likely be different than the typical holiday season,” Wood said.
There are signs that supply chains are finally returning to normal.
See here: The New York Federal Reserve’s Global Supply Chain Pressure Index has fallen sharply since April. Shipping giant Maersk said this week that container freight rates began to decline towards the end of last quarter “due to weakening customer demand, combined with markets starting to normalize with fewer supply chain disruptions” and less congestion .
But companies aren’t out of the woods yet. They still face backlogs that weigh on sales.
Ford saw its October US sales fall 10% over the past year as the company continued to face supply chain difficulties. It said 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 could not finish assembling between 40,000 and 45,000 large SUVs and pickups because it did not have all the required parts.
In March, the company said it would ship some vehicles without some less important computer chips and add them later. Shortages and rising supply costs increased Ford’s expenses by about $1 billion in the third quarter.
My takeaway: Supply chains are complex and messy, and positive developments won’t feed the system overnight. We’re not there yet.