Investors Are On Edge Ahead of the US Federal Reserve’s Two-day Meeting

Fed in Details

Most on Wall Street expect the Fed will lift rates by 75-basis points this week but the bigger question is what happens at the December meeting and beyond.

Bulls are hoping the Fed will signal lower rate hikes starting in December. Bears continue to argue that inflation data has not provided any justification for a less aggressive Fed.

The latest PCE Prices Index was unchanged in September at an annualized rate of +6.2%. The report, released on Friday, also showed that the so-called “core rate”, which strips out food and energy, actually climbed higher to +5.1% versus +4.9% in August, another sign that inflationary pressures are still being felt across nearly every corner of the economy.

Inflation has of course been bolstered by oil, fuel, and other commodity price shocks, pandemic-related residuals (China lockdowns, etc.), and global supply chain issues that have been exacerbated by Russia’s invasion of Ukraine.

These issues have made the inflation fight even tougher for the US Fed and other central banks that have hoped to rein in prices before they become embedded.

Labor Market

The most direct route for inflation to become embedded is via wages, which in the US have been rising at an annual rate of more than +5% for the past year. However, that is substantially below the rate of inflation, providing strong motivation for employees to continue seeking higher wages and a key reason why some are worried about a potential “wage spiral.” That’s also why the Federal Reserve is so keen to cool the job market a bit.

There have been a lot of announcements of hiring slowdowns and even outright job cuts by big companies but US employment data has not reflected anything resembling a pullback in the labor market. It’s worth noting that while big businesses may be looking to cut payrolls, nearly half of small businesses still say they are struggling to hire enough workers, and nearly a quarter are still planning to create new jobs in the last quarter of 2022.

Keep in mind, “small businesses” of 500 employees or fewer make up 99.9% of all US businesses and account for nearly half the US workforce.

It’s also worth keeping in mind that the services sector accounts for more than three-quarters of the US job market. If anything, service sector hiring is expected to accelerate in the last quarter of the year as retail, restaurant, and travel businesses add seasonal employees.

The US Labor Department does try to smooth out these seasonal trends in its official data but the bump in seasonal hiring nonetheless tends to help buoy the numbers in the last few months of the year. Meaning the pullback in the labor market that many are expecting, I argue may not be in the near-term cards.

The October Employment Report on Friday is expected to show job gains around +250,000 following a higher-than-expected increase of +263,000 in September. Importantly, Wall Street is looking for a decline in average hourly earnings to +4.7% from +5%.

Data to Watch

The economic data highlight today is the Dallas Fed Manufacturing Survey.

On the earnings front, bulls are hoping for strong earnings from energy sector companies this week will help lift some of the gloom left by mostly disappointing tech earnings last week. Exxon and Chevron, the two biggest US oil companies, both got things off to a solid start on Friday. Exxon’s profit of nearly $20 billion was a new record for any quarter, and +10% higher than the previous record set in Q2. Chevron’s Q3 profit of $11.2 billion was just slightly weaker than last quarter’s record.

Results from key energy companies this week include BP and Phillips 66 on Tuesday; ConocoPhillips on Thursday; and Dominion Energy and Duke Energy on Friday.

Today’s earnings highlights are Aflac, NXP Semiconductors, and Stryker.

There’s a chance the Fed might sound a bit less hawkish or at least leave a small window open for the bulls in its commentary this week. At the same time, next week, we have the mid-term elections finally moving behind us which might also offer the market a bit less uncertainty.

New Lockdowns in China Creating Worry: The Chinese economy is already struggling because of the nation’s “Zero-Covid”, now there are even more shutdowns in the major gambling city of Macau and in Zhengzhou, the home of Apple‘s largest iPhone assembly plants. Keep in mind, Foxconn, which acts as a supplier to US-based Apple, has hundreds of thousands of workers at its Zhengzhou complex.

Also, new lockdowns have surfaced in Wuhan, where the Covid virus is suspected of originating. Also, Guangzhou’s schools and restaurants have been suspended, while Beijing and Shanghai have seen certain districts targeted for lockdowns. Japanese bank Nomura puts the number of Chinese under restrictions at around 232 million, up from 225 million last week. Some 31 cities there are under some form of lockdown as of Oct. 27, restricting one in six people in China and covering 24.5% of its gross domestic product, the Nomura analysis found.