Another 0.75% hike by the Fed but Markets Expect a More Dovish Approach moving Forward

More or less the entire market is expecting a 75 basis point hike from the US Central Bank today. After all, this has become the norm of 2022 for the Fed. Though one question remains -  what will happen next? The market is reliant on future guidance as to how to price the US Dollar and stocks.

The Market’s Expectations

Economists had been expecting the Federal Fund Rate to increase up to 5% by March of next year. But based on the market’s predictions, the Federal Reserve only has a further 1% to increase after today’s decision. So, the market is now looking to see if this is still the case, and if this means a slowdown to a 50-basis-point hike in December. Currently, this is the most likely outcome and what’s been priced in within the market. Anything different can create high volatility.

According to Senior Market Analyst, Craig Erlam, the Fed’s decision will be based solely on inflation with employment data acting only as a supporting factor. We have a further 2 CPI figures and the NFPs scheduled to be released prior to December’s rate decision. The potential “slowdown” will depend on this data. If inflation increases and the employment sector remains strong, the Fed may opt to maintain the current level of hikes for a longer period.

US Employment Data

In October, the employment sector did not decline but saw signs of slowing. The NFP figure declined to a 9-month-low while the unemployment rate slightly increased. However, the JOLTs Job Opening  released yesterday showed signs of the employment sector remaining strong. It was predicted that the economy would see 9.75 million new vacancies but the actual figure was 10.72 million, which is a 3-month-high. This news triggered a sharp increase in the US Dollar.

The US Dollar Index is trading at 111.44 after a quick and sudden increase from the latest employment data. The price was also supported by the latest manufacturing PMI figures which did not decline to 50.0 or below 50.0 as some economists had expected. The ISM Manufacturing PMI was reported as 50.2 which is a lower figure compared to previous months but still indicates economic growth.

This afternoon, the US is scheduled to release their ADP Non-Farm Payroll which is an estimate that is released prior to the official government announcement. The estimated figure is 178,000, but Friday’s NFP announcement as well as the country’s Unemployment rate  are of main importance. Both figures are expected to indicate a slight slowdown.

Asset Reactions So Far

As mentioned above, the US Dollar has been finding more and more support as we approach the Federal Reserve's announcement, but this was mainly due to positive JOLTS figures. Whereas without this support, the Dollar would have most likely continued to decline as many investors believe that the Fed Chairman, Jerome Powells, will indicate a slowdown.

A dovish tone where the FOMC signals a potential slowdown would pressure the US Dollar and potentially further support the US stock market. However, economists believe that inflation will not decline further in November as the price of fuel, electricity and food products has increased.

The FOMC has also been worried about the rise in the price of US equities. Of course, the Fed does not wish for the stock market to decline but they are looking for the market to be appropriately priced. FOMC members, such as Neil Kashkari, have previously criticized the stock market for not taking the Fed’s forward guidance “seriously”.  The US stock market has slightly declined this week as we approach the end of the last earning season of 2022 and another rate hike this evening.

Crude oil has significantly increased in value over the past 24 hours. The price had reached $89.85 again before slightly declining this morning to $88.60. The rise is likely a result of speculation that China will partially or fully lift their Covid-19 related measures, as well as buyers taking advantage of a lower USD. However, will the price be able to keep up its gains with another rate hike this evening and a further hike tomorrow from the Bank of England?

Overall we can see that the main price driver will be the Fed’s forward guidance, Friday’s employment figures and next week’s inflation data.

Quick Summary:

• Market’s expert a 75 basis point rate hike but a less hawkish Fed going forward.
• Economists are concerned that October’s CPI will remain high as will employment causing further rate hikes.
• Fuel and food prices expected to pressure inflation for October and November.
• Crude Oil prices continue to react positively to Chinese COVID-19 speculation.
• The JOLTS figure was 10.72 million, which is a 3-month-high and supported the US Dollar.