Inflation, the Fed, and the War Spell More Pain for US Equities

The US equity markets are under pressure, with investors unable to shake off the Fed effect. In the third quarter, the NASDAQ fell by 4.11%. Notably, the NASDAQ extended its losing streak to three consecutive quarters, its worst since 2008.

Things have not gotten any better going into the final quarter of the year. After a brief hiatus into positive territory, the NASDAQ 100 is back in the red. Market sensitivity toward US economic indicators and FOMC member chatter is unwavering.

FederalWatch Tool Highlights More Bullish December Bets

Economic data from the first week of October has cemented bets of a 75-basis point Fed rate hike in November.

According to the CME Group’s FedWatch Tool, the probability of a 75-basis point hike is 76.5%. While down from a post-US jobs report of 81.1%, the numbers remain conclusive. However, with the markets accepting a hawkish November move, the focus has shifted to the December policy decision.

This morning, the probability of a 75-basis point December hike stands at 28.1%. The chances of a 75-basis point hike have risen from 0.2% as of October 4 and 0% as of September 30.

Notably, economic data continues painting a rosy economic backdrop that allows the Fed to front load at a more aggressive pace. The Fed and the markets are well aware that once the US unemployment rate inches past 4.0% the rate of deterioration in labor market conditions will likely accelerate, forcing the Fed to take its foot off the gas.

On Monday, Fed Vice Chair Brainard reportedly said that Fed rate hikes were beginning to slow the economy – perhaps more than expected – and that the impact of tighter monetary policy would not be evident for months to come.

Despite Brainard’s impact assessment, the Fed Vice Chair refrained from suggesting the need to take a less aggressive rate path to bring inflation to target.

JPMorgan CEO Jamie Dimon Sounds the Recession Alarm

Fed Vice Chair Brainard’s comments coincided with JPMorgan Chase & Co (JPM) CEO Jamie Dimon, who projected the US and the global economy falling into a recession by mid-2023. Speaking to CNBC,  Dimon said that the US economy is still in good shape while adding,

“But you can’t talk about the economy without talking about stuff in the future – and this is serious stuff.”

Among concerns, Dimon highlighted the effects of inflation, higher-than-expected interest rates, the unknown impact of quantitative tightening, and the war in Ukraine. The JPMorgan CEO also talked of the Fed waiting too long but clearly catching up.

Dimon concluded by saying,

“Far more serious thing is the war. Far more serious than the short-term effects of the economy and things like that.”

JPMorgan Chase will be in the spotlight on Friday when it releases Q3 2022 earnings. Dimon talked of market conditions becoming disorderly in the not-too-distant future. This earnings season could deliver a second blow to a market coming to terms with the Fed’s policy goals.

This morning, the NASDAQ 100 Mini was down 54.5 points, with the Dow Mini and the S&P 500 Mini down by 151 points and 19.75 points, respectively.