Waiting for Powell: Will Today's Pre-Blackout Speech Signal Slower and Lower Rate Hikes?

(Wednesday Market Open) No, the Fed meeting didn’t get moved up two weeks. It just feels that way today as the market prepares for Fed Chairman Jerome Powell’s 1:30 p.m. ET speech.

Powell is in the driver’s seat and Wall Street may just be along for the ride. The last time Powell spoke publicly was after the November 1-2 Federal Open Market Committee (FOMC) meeting, when he spooked the market with hawkishness. Investors might want to brace for a possible repeat this afternoon.

The title of Powell’s speech at the Brookings Institution in Washington—“Economic Outlook, Inflation, and the Labor Market”—suggests he might give investors a sense of what to expect at the next Fed meeting on December 13-14, when the FOMC is scheduled to update its economic forecasts.

In recent days, Fed speakers have delivered a range of messages, from no rate cuts until 2024 and possible peak rates of 7%, to somewhat more comforting predictions of slower rate hikes ahead. We’ll see where Powell falls along that spectrum.

The CME FedWatch Tool has the probability at 67.5% that the FOMC will hike its benchmark rate by 50 basis points next month, down from 75 basis points the previous four meetings. The tool currently indicates that rates will peak next summer between 5% and 5.5%, up from 3.75% to 4% now.

Morning Rush

• The 10-year Treasury yield (TNX) fell one basis point to 3.73%.
• The U.S. Dollar Index ($DXY) dropped 0.3% to 106.46.
• Cboe Volatility Index® (VIX) futures hovered just above 22.
• WTI Crude (/CL) regained $80 per barrel after falling under $74 on Monday.

Carefully watch the S&P 500 index® (SPX), TNX, and VIX during and after Powell’s speech. The TNX remains in a narrow trading zone near recent lows but continued talk of tightening from the chairman could potentially see it test recent highs near 3.83%. Notably, it hasn’t closed above 4% since the October Consumer Price Index (CPI) report came out November 10.

Just In

• The November ADP Employment report this morning was a good sign that the Fed’s rate policy is making progress slowing things down. Headline growth of 127,000 compared with Wall Street’s consensus of 200,000, and interest-rate sensitive sectors like manufacturing and construction both saw hiring numbers fall. Manufacturing was down sharply, as were business and professional services.
• Leisure and hospitality jobs, however, roared higher. Few people likely had such a two-sided report on their bingo cards heading into Wednesday, but be aware the Fed isn’t believed to pay as much attention to ADP data as official government employment numbers. We get those Friday morning.
• Another soft economic reading from China also hit the tape this morning. The country’s November Manufacturing PMI fell to 48.0 from the previous 49.2. Analysts had expected 49.0. Its non-manufacturing PMI also dropped and was below expectations. It was actually a Pacific Rim trifecta, as Japan and South Korea also reported softer-than-expected November industrial production.
• On the other side of the world, there were signs of progress in taming European inflation. Readings came down for the first time since mid-2021. It might not influence the European Central Bank (ECB), but it’s good to see.
• Some of the rally in Crude this week appears related to news reports that China is looking for ways to ease its lockdowns. Keep in mind, though, that when it’s loosened in the past, China’s economy hasn’t snapped back right away because the population hasn’t eagerly gone back out.

Data Dive

• November’s Chicago PMI report is expected after the opening bell today. Though this data has a manufacturing component, it also surveys nonmanufacturing firms. This means it offers a broad look at economic health in the nation’s third-largest metropolis. The consensus headline estimate is 47.5, up slightly from 45.2 in October but still below 50.
• Also, soon after the open, we’ll get a look at the government’s Job Openings and Labor Turnover Survey, better known as the JOLTS survey. Last time out, job openings of 10.7 million remained well above normal but were down slightly from summer peaks.
• But wait, there’s more! October’s Pending Home Sales Index also arrives after the opening bell. If you’re a data fiend, this is your week. Analysts expect a 5.5% month-over-month drop, according to Briefing.com. That’s a bit less dramatic than September’s 10.2% decline. 
• Yesterday’s November Consumer Confidence report revealed some Easter eggs for those who’d like a more dovish Fed. Notably, overall confidence fell to 100.2 from October’s 102.5. Expectations—which track consumers’ short-term outlook for income, business, and labor—fell to 75.4 from 77.9 the previous month, the Conference Board said. Intentions to purchase homes, automobiles, and big-ticket appliances all cooled in November.

Thinking Cap

Even if the Fed’s rate-hike cycle is starting to crest, investors need to be careful about getting too far in front of things and buying in on rallies too early. That’s because the Fed might want to keep market enthusiasm at a low roar. Fed officials could worry that continued strength on Wall Street and the associated “wealth effect” might short-circuit its efforts to bring inflation to heel.

That sets up the potential opposite of what used to be called the “Fed put.” Back in the day, when market participants grew anxious about the economy, Fed officials would often make dovish comments or, more rarely, would reduce rates to ease market worries. During the 30 years between 1990 and 2020, many investors felt, accurately or not, that the Fed “had their back.”

“It’s different this time,” wrote Charles Schwab Chief Investment Strategist Liz Ann Sonders in a note Tuesday. “The Fed has been distinguishing between financial market volatility and financial system instability, with only the latter likely to trigger a shift in policy. In fact, for now, a weaker equity market helping to tighten financial conditions (not to mention rein in speculative excess) is a feature of Fed policy, not a bug.

“Assuming a continuation of the year-end rally that began in mid-October, the Fed may be forced to push back on related enthusiasm (a ‘Fed call’) if financial conditions continue to loosen,” Sonders wrote. “This is precisely what happened last August when Powell had to ‘talk down’ the stock market’s enthusiasm around a perceived coming pivot by the Fed.”

Reviewing the Market Minutes

Stocks had a case of the gloomy November doldrums the first two days of this week, but major indexes showed some resilience Tuesday and closed well off their intraday lows. News that Congress and the White House may cooperate across party lines to prevent what could be a devastating December rail strike perhaps gave Wall Street a late lift Tuesday.

Here’s how the major indexes performed Tuesday:

• The Dow Jones Industrial Average® ($DJI) edged up 3.07, or 0.01% to 33,852.
• The Nasdaq Composite® ($COMP) fell 0.59% to 10,983.
• The Russell 2000® (RUT) rose 0.32% to 1,836.
• The SPX finished off 0.16% to 3,957 but rebounded after briefly trading below a technical support level at 3,940.

It was hard to detect much of a sector pattern in Tuesday’s trading. Over the last five sessions, however, defensive sectors like utilities, staples, and health care did best. Other than energy, these also are the sectors with the best 2022 performance.

CHART OF THE DAY:  COPPER-TOP? If you’re looking for a solid economic barometer, you could do worse than copper (/HG—candlesticks). Like the S&P 500 Index (SPX—purple line), copper has had a tough second half of 2022, but recently appeared to find some stability. It remains far below 2022 highs, but if it can rebound, it may reflect investors getting less anxious about China, a huge source of demand for the commodity used in so many industrial applications. Data Sources: CME Group, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

This afternoon’s earnings calendar includes Synopsis (SNPS) and Salesforce (CRM), and early tomorrow we’ll hear from Kroger (KR) and Dollar General (DG).

Cloud Competition: CRM puts the spotlight on cloud computing after a tough go-around for other major cloud companies in their recent quarterly reports. Amazon’s (AMZN) Q3 cloud business had its weakest growth recorded since the company began reporting cloud revenue in 2014, and AMZN said its cloud business growth appeared to slow more as the quarter advanced.

AMZN cited “macroeconomic uncertainties,” but also appears to be losing market share. Microsoft’s (MSFT) cloud revenue was also below Wall Street’s expectations in its most recent quarter.

The last time CRM reported, it beat consensus expectations but delivered fiscal 2023 guidance that appeared to disappoint Wall Street. It did approve a large buyback program, however.

Hon, I Got the Groceries! KR’s earnings Thursday morning give investors a chance for more insight into the company’s plans to buy Albertsons (ACI). The companies appeared at a Senate hearing on antitrust Tuesday to field questions about the proposed $20 billion merger. Together, the two companies could command about 13% of food-retail sales in the U.S. following divestitures, The Wall Street Journal reported Tuesday, citing JP Morgan Chase & Co. (JPM) analysts. There’s a lot of concern from consumer groups and politicians that the merger could hurt competition.

Looking at KR’s broader business, the company is under pressure to deliver another solid quarter after outperforming Wall Street’s expectations back in Q2 and raising guidance. Groceries appear to be a point of strength in the U.S. economy despite food-cost inflation, helping lift Walmart’s (WMT) revenue in its most recent quarter. The question for KR is whether shoppers seeking bargains shifted more to stores like WMT as they sought price relief, though KR has many of its own store brands that compete on price.

Coupon Clipping: DG is one place people tend to go when they’re looking for savings, so we’ll see if it benefitted from lower-income, and even some middle-income, shoppers taking their business there as economic conditions grew tougher. DG is one business you might expect to benefit if the country is actually on the verge of recession.

Notable Calendar Items

Dec. 1: October Construction Spending, October Personal Consumption Expenditure (PCE) prices, November ISM Manufacturing Index, October Construction Spending, and expected earnings from Kroger (KR)

Dec. 2: November Nonfarm Payrolls and expected earnings from Cracker Barrel (CBRL)

Dec. 5: November ISM Non-Manufacturing Index and October Factory Orders

Dec. 6: October Trade Balance and expected earnings from AutoZone (AZO) and Casey’s General Stores (CASY)

Dec. 7: October Consumer Credit and expected earnings from Campbell Soup (CPB)

Dec. 8: Expected earnings from Broadcom (AVGO) and Costco (COST)

Dec. 9: November Producer Price Index (PPI) and Preliminary December University of Michigan Consumer Sentiment Index.

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