The Week Behind 

The FED was uncomfortably hawkish and Payrolls were uncomfortably hot. While there is nuance to each, the week saw the majors end lower as treasury yields ended higher. The DOW trimmed 1.4%, S&P lost 3.35%, and the NASDAQ dropped 5.45%. For a second consecutive week, this time in a down tape instead of an up tape, the DOW was the outperformer, the S&P landed in the middle, and the NASDAQ lagged. AAPL underperformed in a major way, dropping 10% this week. Relative performance of this magnitude on both the upside and downside added to the conversation surrounding a leadership shift from the “new economy”-NASDAQ to the “old economy”-DOW. 

Highlights

• During the Q&A portion of the presser, Powell revealed it was “premature to be thinking about pausing” (10) as the committee feels “rate hikes [need] to get to that level of sufficiently restrictive” (10), which, while uncertain, is higher than thought at the time of September’s meeting (5).
• The US2YR made a new cycle high during Powell’s press conference, ~4.7%, but backed off from that high to end the week.
• Action of the US10YR followed the US2YR; however, did not make a new cycle high.
• The USD ended the week slightly lower.
• Rumors surfaced that China may finally relax zero-COVID policy, boosting emerging market, material, and energy equities.

Dissention in the FED

While the enduring message out of the FOMC press conference was a more hawkish FED, the FOMC Statement, which was released 30 minutes prior to the press conference, appeared to have a dovish tilt: stocks rallied, yields declined. I believe there was one specific line that lead to this interpretation:

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.

In other words, the FED may consider what they had already done – four, historically large, 75bp rate hikes – in future decisions. It was exactly what the bulls wanted: the FED admitted the tightening already done was substantial and warranted consideration in the future decisions given the lag effect. However, when Powell took the podium, he eliminated any dovish interpretation by insisting the FED was far from a pivot of any magnitude as consensus surrounding the terminal Fed Funds Rate was certainly higher now than it was last month due to hotter-than-expected CPI and Payrolls data.   

While there is a lot to digest, I think the most important takeaway resides in the stark contrast between the FOMC Statement and the FOMC Conference. How could their tone differ to such a degree? I think it is a sign the FED is no longer as unanimous as it was since coming together in June to levy the first 75bp hike. In my view, the dovish undertones in the statement suggest there is a growing view among FED members that it may be time to consider a shift to a more passive, “wait-and-see” policy while keeping interest rates high. 

The Week Ahead

With many of the big-name companies having already reported, focus returns to the macro. 

Monday, the new queen hawk, Loretta Mester of the Cleveland FED, will give a lecture on women in economics. Following, there will be a Q&A, in which I could foresee multiple hawkish headlines emerging. 

Tuesday is election day. Many have been itching to get midterms behind them. Headlines surrounding the event could move markets. Politics aside, stocks prefer congressional gridlock. Consequently, good news for Republicans is likely good news for the markets. 

Thursday, we’ll get initial and continuous jobless claims alongside CPI for October. Last month, Headline came in at 8.2%, a third consecutive MoM decrease. Consensus for October is 8%, which would build the streak to four. With respect to Core, last month was 6.6%, a new peak. Consensus this month is 6.5%. CPI tends to be a negative event for equities. I would not be surprised to see a sell-off into Wednesday’s close. That being said, given we reached a new peak for Core last month and consensus is only looking for 0.1% decrease, I actually like the low-bar setup for an upside surprise.

Friday, Loretta Mester finds another microphone. Regardless of CPI, I do not expect her to have anything neutral to say. If CPI is hot, I expect her comments to compound the negativity. If CPI is cool, I do not expect any bearish comment she makes will overwhelm the bullish momentum a positive CPI would generate.

October Payrolls: A Bearish Report & A Bullish Response

Overall. I think October Payrolls clears the way for continued hawkishness. Job creation and wage growth were above expectations. Initially, futures were down. The reversal occurred once unemployment hit the wire: 3.7%, up 0.2% from last month. The dollar weakened and yields backed off allowing the major indices to close Friday ~1.3% higher. While I am not sure this report warranted a rally, Friday’s tape revealed the stock market equates the probability of a more dovish FED with higher unemployment, which makes sense given FED messaging over the past couple months. It is the only way I can explain why a mostly bearish report for stocks would be met with a bullish surprise.