Will the Fed make a dovish pivot? – Daily Market Brief, November 2, 2022

The Fed is set to hike rates by 75 basis points. But what comes next is likely to drive the market. Failure to signal to a slower pace of hikes could pull stocks lower.

·         JOLTS job vacancies unexpectedly jumped to 10.72M raising doubts over a dovish pivot.

·         Hang Seng extended its recovery on optimism that China could consider ending zero-COVID.

·         Eurozone manufacturing PMI for October is expected to contract further.

US stocks ended in the red yesterday after ISM manufacturing data and JOLTS job openings came in ahead of forecasts. The ISM manufacturing PMI was slightly ahead at 50.2 in October, against the 50 forecast. The JOLTS job openings, however, were more of an eye-opener, with US job vacancies rising by 437k to 10.72 million. This was the last piece of data that the Fed will see before it takes its decision today and points to a very tight labour market.

75 basis points

This data is unlikely to affect the interest rate decision for November. A 75-basis point rate hike is almost completely priced in for today, taking the Fed fund rate to 4%. Instead, the big question is, what comes next? Over recent weeks the market has been weighing up the likelihood of the Fed adopting a less hawkish stance, slowing the pace of rate hikes from the December meeting. These expectations helped the Dow Jones rally 14% in October, the S&P500 8%, and the USD fall.

50 bps in December?

With December’s outlook the driving force behind the market, there is plenty of room for disappointment. Firstly, the Fed may not even discuss a pivot to 50 basis points hike in December. Secondly, recent data also raises doubts over whether the Fed will slow the pace of hikes. Core inflation is still rising; US GDP was stronger than forecast, which, combined with yesterday’s job vacancy and ISM manufacturing figures, suggest that the Fed could keep hiking rates aggressively into next year. This wouldn’t be the first time that the market gets ahead of itself over a dovish pivot from the Fed.

Given that the recent market rally has been helped higher by dovish pivot bets, any disappointment here could see stocks fall lower.

Similarly, the USD index has fallen from its 20-year high on expectations that the Fed could slow the pace of hikes. Failure of this materialising could see the greenback rally again.

Meanwhile, should the Fed reveal a dovish signal, stocks could continue their ascent, USD eases back, and Gold, which is struggling around $1650 at the time of writing, could target $1675.

Hang Seng extends rally

Ahead of the Fed meeting, European bourses are set for a stronger start, helped higher by the second day of gains in Asia amid ongoing but unconfirmed speculation that China is considering ways to exit its zero-COVID strategy. The Hang Seng surged 5% yesterday and is up a further 2.4% at the time of writing.

Eurozone PMI

In Europe, attention will be on manufacturing PMI data from Europe, which is expected to show that activity in the sector contracted further in October, adding to evidence that the bloc is heading for a recession. A downward revision could hurt sentiment, weighing on stocks and the euro.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

Sources: Bloomberg, CNBC, Reuters

Original article provided by Trading Writers

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