Powell can work, but won’t break the S&P 500 rally

If the markets are right, today’s Fed meeting policy statement will herald the second-to-last rate hike of the cycle, with a quarter-point move expected to be matched on March 22. . However, Federal Reserve Chairman Jerome Powell may have other ideas. . That’s why the S&P 500 fell from a six-week high on Monday.




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Markets firmed on Tuesday after the employment cost index showed weaker wage growth in the fourth quarter. However, a surprising increase in job openings reported by the Labor Department on Wednesday put the S&P 500 back on the defensive ahead of the Fed’s 2 p.m. meeting announcement.

Powell could explain why interest rates may need to rise further after today’s rate hike and stay there longer than investors think. Even so, Wall Street is doubling down on its belief that the rate hikes are about to end. In fact, the odds of a quarter-point hike in March rose from 98% on Monday to 83% today, according to the CME Group’s FedWatch page.

While the markets may turn out to be right, today’s Fed meeting is about policymakers keeping their options open. Moreover, Powell has no interest in providing fodder for the S&P 500 to rise and Treasury yields to fall.

The big reveal will be how Powell characterizes the balance of risk. If he says they are now balanced between higher-than-expected inflation and lower inflation amid a weakening economy, the S&P 500 will shoot higher. But he probably isn’t ready to go just yet and will continue to say inflation risks are on the rise.

A clear S&P 500 rally signal would come if the policy statement dropped language saying the policy committee anticipated “continued increases” in the Fed’s key interest rate. Most expect the language to stick.

Fed Meeting Minutes Fire Warning Shot

Minutes from the Fed’s meeting in mid-December highlighted policymakers’ concerns about an “unwarranted easing of financial conditions.” The rallying of financial markets could “complicate the Committee’s efforts to restore price stability,” according to the minutes.

This concern may have been at the forefront of policymakers’ minds at this week’s Fed meeting. Indeed, the Chicago Fed’s indicator of domestic financial conditions through Jan. 20 showed they were easier than at any time since rate hikes began last March.

Still, Powell’s 2:30 p.m. press conference after the Fed meeting wraps up will hardly be the final word on the rate hike outlook. Arguably, the series of labor market data released this week will have more impact on the markets than Powell.

Jobs, salary data is essential

On Tuesday morning, the Labor Department’s Employment Cost Index showed compensation costs rose 1% in the fourth quarter versus 1.1% expected. However, earnings rose 5.1% from a year ago, up slightly from the 5% growth in the third quarter.

Economists pay particular attention to the wage growth of private sector workers, excluding those in performance-based jobs, as a good indicator of underlying wage growth. In the fourth quarter, compensation in this category rose 0.9%, or an annualized rate of 3.6%. This measure excludes occupations in which pay is determined by commission, which may be more influenced by cyclical ups and downs.

The ECI report takes on added importance, with the Fed stressing the need for weaker wage growth to bring inflation back to the 2% target. Powell said a drop in wage growth to 3.5% would be sufficient.

Still, after the good news on wage growth, an unexpected jump from 572,000 job openings to 11 million in December dampened investor enthusiasm.

Powell has repeatedly pointed to the excess of job openings relative to the unemployed as one of the main reasons for unusually strong wage growth. In December, the job-to-unemployed ratio fell from 1.7 to 1.9, well above the pre-Covid peak.

With consumer spending and manufacturing both showing signs of weakness, January’s jobs report will provide more evidence on whether the economy’s last major source of strength is giving way. . Analysts expect a solid gain of 185,000 jobs, but average hourly wage growth is expected to slow to 4.4% from 4.6% in December.

Setting up the S&P 500

In Wednesday morning stock action, the S&P 500 slipped 0.2%. This followed Tuesday’s 1.5% gain for the S&P 500 after the more subdued data from the ECI. Through Tuesday’s close, the S&P 500 had rebounded 14% from its October 12 bear market closing low, but was still 15% below its all-time high.

On Friday, the S&P 500 peaked around 4094, making a third run at 4100 since early December. This is the key level to watch for now. On Tuesday, the S&P 500 closed at 4076.60, just off its high for the day.

Be sure to read IBD’s The Big Picture every day to stay in tune with the direction of the market and what it means for your trading decisions.

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