To Pivot or Not To Pivot
That's the qFEDtion.
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FED’s next move
A strong job market is a reason why many believe that the FED has a long way to go before we see a slowdown in rate hikes. But could that change soon?
Expectations surveys across the economy have become quite pessimistic, with businesses expecting lower sales and consumers seeing bleaker personal finances (as seen during last week’s earnings).
Many companies announced hiring freezes, layoffs, earnings compression, cautious customer spending, etc…
We’re seeing the largest gap since the 1950s between the year-over-year change in seasonally adjusted nonfarm payrolls and non-adjusted payrolls, when conceptually these measures should be equal.
The unemployment rate should rise to 4.2 percent with a cumulative decline in payrolls of over 800,000. As the jobs picture worsens, the Fed should gain confidence that tightening is having its intended effect.
That confidence should open up the door to a downshift in the pace of rate hikes at the December meeting. This will be very well received by the markets, where there is huge pent-up demand for a Fed pivot. But as a recession continues to play out next year, risk assets would likely see renewed weakness, while interest rates would head lower.
Last month, the CPI report came in a bit hotter than expected (bad for stocks), which meant that the FED will probably continue their aggressive rate hikes.
• CPI MoM: 0.4%
→ vs 0.2% Expected
• CPI Ex Food & Energy MoM: 0.6%
→ vs 0.4% Expected
• CPI YoY: 8.2%
→ vs 8.1% Expected
• CPI Ex Food & Energy YoY: 6.6%
→ vs 6.5% Expected
As you can see above, the next one looks very similar but maybe we’ll get a surprise.
Many agree that the FED acted too late to the breakout of inflation last year, and is now overcorrecting. I still believe we will see another 75BPS hike but that might be the last one as it will become very clear to Chairman Jerome Powell that the global economy has slowed down significantly and inflation has peaked.