US Stock Markets Daily Analysis – Traders Navigate a Minefield of Uncertainty

Federal Reserve Monetary Policy

Four regional Fed Presidents yesterday all delivered a similar message – the Fed still has a long way to go in its inflation fight and may need to go further than Wall Street is currently anticipating.

I also believe the Fed is working to control various asset classes and the last thing they want to see happen is a stock market that continues to rally and makes people feel wealthier.

The most hawkish among the Fed speakers, St. Louis Fed President James Bullard, reiterated a previous warning that rates may need to climb as high as +7% and could stay high into 2024. Wall Street mostly expects rates to top out at 5% around mid-2023.

Keep in mind, the Fed is trying to create tighter financial conditions, and deflate the “wealth effect”. In other words, they need people to feel less wealthy so they will stop spending as much and hopefully bring down inflation. How much pain they are willing to inflict on markets is a big unknown, and Wall Street will likely remain on edge ahead of Fed Chair Jerome Powell’s speech on Wednesday.

Investors today will be digesting September home price data from both Case-Shiller and the FHFA with most analysts expecting another month of declines. Consumer Confidence will also be of high interest today, particularly consumers’ inflation expectations, a gauge the Fed closely monitors.

Consumers’ 1-year inflation expectations moved up to +7% in October after a slight decline in September but are down from near +8% earlier this summer.

On the earnings front, results are due from CrowdStrike, Hewlett Packard, and Intuit.

Situation in China

Turning to China, protests against the country’s never-ending lockdowns appear to be ongoing. The US embassy in Beijing yesterday advised Americans in China to gather essential supplies and warned that lockdowns and other restrictions could intensify as the government attempts to simultaneously quash Covid outbreaks and the unrest.

It’s worth noting that China’s state-run media outlets are heavily singing the praises of the country’s zero-Covid measures, which indicates the government intends to stick with current policy. Most insiders believe Chinese authorities may announce plans to loosen restrictions in order to calm the masses but warn those promises should be taken with a grain of salt. Ultimately, China doesn’t have the medical resources to deal with a major Covid outbreak so it’s tough to imagine them loosening restrictions, at least not while cases are still climbing to new records.

The Communist Party is also not known for admitting it’s made a policy mistake and China experts say they are more likely to double-down than they are to back off.