U.S. stocks closed higher after yet another choppy week on Friday, 4th November 2022, in defiance of a still hawkish Federal Reserve.
On Wednesday, the Federal Reserve raise interest rates by another 75 basis points as widely expected.
The tone of Chairman Jay Powell was stubbornly hawkish to match the stubborn inflation the economy is experiencing. The market was hoping for a sign of a pivot which he did not give.
On Friday, the jobs report was mixed with a higher-than-expected payroll number of +261,000 and an unemployment rate of 3.7%, which was more than the 3.6% that was forecasted.
The initial reaction was down, then up then down again but a rally near the close put the market in the black.
The 10-year Treasury yield ended the week at 4.16% and the 2-year yield stood at 4.66%.
For the full week, the major averages finished lower, with the Dow shedding down 1.4%, the S&P off 3.4%, and the Nasdaq slumping 5.7%.
Here are the closing levels on Friday, 4th November 2022:
There were many interpretations of Jerome Powell’s comments after raising rates by 75 basis points for a 4th straight time. The common takeaway is that future hikes may be lower, like 50 basis points, but the terminal rate, the rate at which they will stop, may be higher than 5%.
Let’s also not forget that they intend to keep this rate for a long period of time.
His comments should have been enough to change the minds of those expecting a pivot, a change to easy policy, that it is not on the cards for the moment.
So why isn’t the market lower? Why the rally at the close?
Again, it’s always hard to predict the market.
The dollar came off its highs, and so did yields in a manner that many would think that it was overdone. There are still some equity bulls that feel that the Fed moves may be overdone.
They may be right, although, it has been said that Powell would rather overtighten than be left behind the curve again.
He said the cost of over-tightening is less than the cost of inflation not being under control.
With that in mind, we must expect rates to keep going higher and staying higher for some time.
The effects of higher interest rates are painful and from my personal experience of refinancing my home loan, it is very painful.
It’s going to hurt a lot of companies, not just in forward valuations but eventually eating into margins and profits.
Can we see a rebound in markets?
Have we seen the lows and it’s time to position a change in the trend?
It would take a very brave or stubborn person to believe that the selling is over. We will most certainly see big swings up and down but the trend I’m afraid is still down for now.
Source: CBOE, Bloomberg
This commentary is written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.
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