Fed Pivot Bets Leave the NASDAQ Composite Index Open to a Big Fall

Market risk sentiment turned bullish through the Asian market session today. The shift in investor sentiment came despite COVID-19 news from China. Stringent containment measures raise the prospects of a deeper contraction in China’s private sector.

On Monday, news hit the wires that COVID-19 curbs in China could sink iPhone production at a Foxconn plant by as much as 30%. While Foxconn is reportedly planning to ramp up production elsewhere to cover the slump, the timing is bad for Apple (AAPL) and the retail sector.

However, despite the ever-present threat of more stringent measures across the country, the Asian markets made solid gains.

The Hang Seng Index was up 4.58% today, with the CSI300 gaining 2.44%. Earlier in the day, the ASX200 rose by 1.65%, with RBA delivering support.

Fed Pivot Bets Drive Demand For Riskier Assets

Driving the bullish sentiment is the hope of a December Fed pivot. On the day before the FOMC blackout period, the Wall Street Journal reported Fed plans to discuss a smaller rate hike in December. The report raised hopes of less aggressive policy moves to bring inflation to target.

The report coincided with similar comments from FOMC member Mary Daly. With no other FOMC views to consider because of the blackout period, the WSJ report has continued to support bets of a December pivot.

Despite the market sentiment, there is still plenty of uncertainty over the December move.

Better-than-expected Q3 GDP numbers, unemployment at 3.5%, and a pickup in US inflationary pressure raise question marks. In contrast, a deeper contraction in private sector activity, a slide in consumer confidence, and slower house price growth favor a Fed pivot.

Notably, the Wall Street Journal report suggested a change of tact, which may not represent the broader consensus of Committee members.

Nonetheless, the global financial markets are betting on a December Fed pivot. According to the FedWatch Tool, the probability of a 75 basis point December rate hike stands at 46.6% versus 47.9% for a 50 basis point hike. One week earlier, the odds were stacked more in favor of a 75 basis point hike.

However, Fed Chair Powell was clear that the Fed would bring inflation to target at any cost.

Market Sentiment Remains Bullish Ahead of FOMC Member Gathering

On Monday, the US markets showed some apprehension ahead of the Wednesday policy decision and press conference. The losses were minor considering the upswing since October 21. The NASDAQ Composite Index fell by just 1.03% and the S&P500 by 0.75%.

This morning, the S&P 500 mini and the NASDAQ 100 mini are up 22.5 points and 77.75 points, respectively. Early moves suggest optimism that today’s stats will support a December Fed pivot.

Upbeat stats could swing the pendulum back in favor of the hawks this week. More importantly, Wednesday could be painful if the Fed sticks to its guns and highlights the need to front-load its way into the New Year.

Later today, ISM Manufacturing PMI and JOLTs job openings will draw interest ahead of ADP nonfarm employment numbers on Wednesday and the Jobs report on Friday.