Stocks sink, yields rise after Federal Reserve Chair Powell said it is "very premature" to talk policy pivot

The Morning Wrap

Livewire Markets

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

Source: Investing.com

S&P 500 TECHNICALS

Source: Yahoo Finance

FEDERAL RESERVE WRAP

The Federal Reserve's actual statement delivered a more or less copycat of the September decision bar two extra lines. In a unanimous decision, the world's most powerful central bank hiked interest rates by 75 basis points to a new range of 3.75% to 4% (Note: in the US, they don't use a target as everyone else does. They use a range.)

The two extra lines are as follows:

The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.
In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

These two lines mean a couple of things. 1) They have further to go but we don't know by how much and 2) Future rate hikes will now have to consider how much more interest rates have to go. It doesn't outright mean a pivot is coming, but the change in language is a sign they are at least considering it. 

It also means the Federal Reserve is recognising the time lag that monetary policy has on the economy (the theory suggests it could take as long as 18 months to know what effect rate hikes have finally had on Main Street). That could also help explain why there has been a cautious but key change in language.

Then came the press conference where Chair Jerome Powell essentially shut down any hopes of a policy pivot. In his introductory remarks, he noted the terminal rate will end up being higher than where the Fed first thought. In addition, he noted it's still too premature to think about pausing rate hikes. He also believes the US central bank has not overtightened, arguing (once again) that doing too much is better than doing too little.

All of this points to a non-pivot at the Fed. The next decision is 5am on December 15th, Sydney time. Set your alarm clocks by it.

Added Note: TD has become one of Wall Street's first firms to change its terminal rate forecast. They have added an extra 50 basis points hike in February next year, taking the Federal Reserve's expected endgame closer to 5.5%. 

THE CHART

Source: Bloomberg

And keeping with the Fed theme, today's chart is the S&P 500 in the months following the last rate hike in a regular Federal Reserve cycle. The chart suggests equities are generally rangebound once it takes a pause - possibly for as long as six months. Another reason time is as important as timing in this market.

THE CALENDAR

Source: Forex Factory

If you thought one central bank was enough for one day, then brace yourself for another. The Bank of England meets this evening (Sydney time). In all likelihood, it will also raise interest rates by 75 basis points. But this is also the first monetary policy meeting for Andrew Bailey and co since early August... when Boris Johnson was still Prime Minister. 

The Bank of England is also unusual in that it releases the outcome of its committee vote breakdown. If it's anything but a 9-0-0 vote (i.e. 9 in favour, 0 against, 0 abstentions), then the British Pound could be in for a wild ride. Oh, and there are some updated economic projections to focus on too. Phew.

THE TWEET

Say a prayer for Doug.

STOCKS TO WATCH

Yesterday, we talked about Citi's analysis of the resources sector. Today, we're doing part two of Citi's sector analysis pieces and discussing what the US big tech earnings could mean for our local tech names. 

Namely, the spotlight is being put on Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Meta (NYSE: META). 

The general conclusion from those big four earnings suggests potential near-term demand weakness. And that's not good news for names like Megaport (ASX: MP1). But given long-term
adoption trends for cloud and digital reality are still intact, there's no reason to lose faith in MP1 or NextDC (ASX: NXT).

Hans Lee wrote today's report.

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The Morning Wrap
Markets Wrap
Livewire Markets

Australia's most comprehensive markets wrap is back for 2023, with a fresh look and a new emphasis on getting you and your money ahead of the curve. Available each weekday morning at 8:30am AEDT. Written by Chris Conway, Kerry Sun, and Hans Lee.

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