U.S. stocks are declining as the Fed sticks to the hawkish script that supports the idea that this economy is quickly heading towards a recession. Equities extended declines after the latest round of Fed speak reminded us that policy-makers could remain very hawkish, despite a downshift to a half-point pace in December. Fed’s James Bullard noted that the policy rate is not yet ‘sufficiently restrictive.’ He also highlighted a dovish scenario that could take the funds rate to 5% and a hawkish rate at 7%. Bullard said, he’s targeting a minimum of another 125 basis points in rate hikes, which would bring the target range to 5.00-5.25%.
Fed’s Esther George said, “I’m looking at a labor market that is so tight, I don’t know how you continue to bring this level of inflation down without having some real slowing, and maybe we even have contraction in the economy to get there.”
If we still have millions of job openings and inflation above rates, the Fed may need to continue hiking beyond February.
This bear market rally is coming to an end as this economy is about to feel the real impact of restrictive territory. The latest round of economic data complicates the Fed’s tightening path as the labor market is slowly softening and as the housing market is in a recession.
U.S. Data
Weekly jobless claims edged lower despite what feels like a couple of weeks of significant job loss announcements. Initial jobless claims fell from a revised 226,000 to 222,000 in the week ending Nov. 12. Continuing claims rose to 1.507 million but is still below the pre-pandemic average of 1.7 million. The job market is going to weaken, but the longer it takes, the greater the risks that we might see more Fed tightening.
The Philadelphia Fed business outlook crumbled in November. The headline manufacturing activity reading plunged to -19.4, worse than the estimate of a decline of 6. The employment component showed a significant drop from 28.5 to 7.1. This part of the economy is clearly weakening, but firms continue to report overall price increases.
The housing market correction continues and is approaching a bottom. Both starts and permits continue to decline as borrowing costs skyrocket, inventory levels are growing, and the typical single-family home purchaser is much weaker as inflation runs wild.
Crypto
Cryptos are weakening as risk appetite just left the building. Today’s weakness is mainly attributed to exhaustion with the bear market rally that has powered stocks. There is no shortage of news across crypto markets and a lot of it is speculative. We will be talking a lot about FTX for months to come but what will drive the cryptos is if Binance, Coinbase (NASDAQ:COIN), Lbank or Consbit have any liquidity crunches.
A lot of bad news has been priced in so it might take another downfall of a major crypto company or a de-risking movement on Wall Street to take Bitcoin below its recent low.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.