Despite ending Friday on a mixed note, stocks rose for week as investors digested comments from Fed officials, inflation data, and the monthly jobs report.
Federal Reserve chair Jerome Powell spoke Wednesday afternoon in a speech that rallied markets and boosted bets on a December pivot to a smaller rate hike.
The Fed chair underscored that the full effects of previous rate hikes “are yet to be felt” as there are “uncertain lags” between tightening and turmoil. Powell continued that “it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down” before saying the pivot could come as soon as December.
This was encouraging for markets as the acknowledgment of a lag takes some weight off the shoulders of ensuing economic reports. This is because previously, we were watching for signs that the economy is slowing (via weakening economic reports) for signs that a pivot is coming. Now, we can ascertain that singular better-than-expected reports won’t damn markets with an extra jumbo rate hike.
While this was encouraging, it's important to note that these dovish words hardly got out of Powell’s mouth before he struck a hawkish tone.
“Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.”
Here Powell separated two things that often get grouped by investors: how high rates go and how fast they get there. Investors had often been assuming that a quicker pivot meant a lower terminal rate, but that doesn’t appear to be the case.
Currently, the Fed Funds futures are pricing in a 77% chance of a 50 basis points hike to a 23% chance of a 75-point hike.
The Fed’s preferred inflation gauge, PCE Prices, followed on the heels of Powell’s speech with a Thursday morning release.
The report was mixed. On the inflation side of things, headline PCE eased with a 0.3% rise against estimates for a 0.4% jump while the core report met expectations for a 0.2% monthly increase.
The other side of the report, regarding personal spending and income, was a letdown. Personal spending rose 0.8% in October following a 0.6% rise in October. Meanwhile, income rose more than expected with a 0.7% rise compared to estimates for a monthly rise of 0.4%.
In Powell’s speech, he underscored that the Fed is more equipped to influence the core reading, so the primary focus should be on that win. However, he also said that wage growth remains too high for target inflation at 2%, so the higher-than-expected personal income reading puts a cloud over the report.
Nonfarm payrolls and nonfarm private payrolls were both higher than estimates and lower than the previous month.
The public sector added 263,000 against estimates for 200,000 jobs, while the private sector added 221,000 jobs against the same estimate. The unemployment rate stayed steady at 3.7%. Both nonfarm payrolls and nonfarm private payrolls saw an upward revision to the October figure.
The report itself supports the higher-for-longer Fed narrative. Whether that takes a new form of smaller hikes to a higher terminal rate is yet to be seen. However, the “uncertain lags” between tightening and a slowing economy need to start rearing their head in the labor market as it remains red hot and depressing to markets.
All told, stocks rose this week. The S&P 500 jumped 2.58%, while the Dow underperformed with a 1.59% rise and the Nasdaq outperformed with a 3.6% march.