U.S. Shares Tumble on Hawkish Fed Signals

On Wednesday, 2 November, the US Federal Reserve implemented its fourth mega hike, raising interest rates by 75 basis points, or 0.75%, in its continuing fight against high inflation. This brings the current Fed’s benchmark rate to 3.75% – 4%, with rates expected to hit a ceiling at 4.5% – 4.75% in 2023 according to the Fed’s own projections. 

Any projections, however, depend on whether inflation seems to be budging. Figures are still near 40-year highs, with year-on-year CPI change at 8.2% for September and forecasted at 8.1% for October. 

“We think that we have a ways to go, we have some ground to cover with interest rates before we get to that level of interest rates that we think is sufficiently restrictive,” said Powell in his speech. 

The Fed Chair, however, noted that the pace of increases might slow in the coming meetings – causing some market players to shift their focus from the size of the next rate hike, to when Fed fund rates might peak, and how long will they stay at the peak. 

Post-Market

Powell’s message was clear that there would be no dovish pivot: the Fed might be slowing down the rate of hikes, but already-high interest rates would see a peak later than expected, and that peak would be persistent for as long as inflation remains unsoothed. 

U.S. equities dove as the markets digested the information, with the S&P 500 down 2.5% and the Dow Jones down 1.55%. The tech-heavy Nasdaq sunk 3.39%. This was followed closely by the Asian markets as the Hang Seng snapped a massive rebound earlier in the week, losing 2.4%. 

Predictably, the dollar gained in strength at Powell’s hawkish announcement, with the dollar index moving up 0.56% while the euro and pound both lost 0.60% and 0.80% respectively. While the European Central Bank and Bank of England both have 75 bps hikes planned – in step with the Fed – both have their currencies weakened by less-resilient economies, with the UK, in particular, facing an urgent threat of recession. In addition, the European central bank continues to lean dovish, with quantitative easing expected to continue until 2024 – so expect dollar strength to continue.

Investors are now advised to look out for Friday’s (04/11) Nonfarm Payrolls numbers for October, an important figure from the Bureau of Labour Statistics (BLS) that measures employment in the U.S., forecasted at an increase of 200K , versus the previous month’s figure of 263K. For comparison, the ADP Nonfarm Employment Change reported an increase of 239K, vastly outperforming the forecasted 195K – although the ADP’s figures very rarely pre-empt the BLS’ with accuracy. 

As a  friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.