For the past few months, we have been waiting for one of the central banks around the world to blink, aka to shift its tone from extremely hawkish to less hawkish or even dovish. Finally, the BoC was the first to do so, after being the first bank to raise rates after Covid, it is now the first bank to blink and shift the tone. The RBA also followed the BoC a few days later, delivering a dovish hike. Will the Fed be next?
Inflation is still high
Looking at multiple metrics, inflation in the US is still too high, but there are some signs of a slowing down and possibly a peak. Although Core inflation hit a new record last month at 6.6%, the CPI is still fading somehow, declining for three months in a row.
Manufacturing PMI data also support the idea of disinflation, the price paid posted seven months of consecutive declines and just hit 46.6 in October which is the lowest level since 2020. Non-Manufacturing PMI price paid also posted five months of consecutive declines towards 68.7 in October as well.
However, global inflation remains too high as well. In addition, the recent developments between Ukraine and Russia add more risk of another leg higher. Yet, we believe that a peak is around the corner. If not through governments, it will be through consumers.
What The Fed Might Do Next?
The Federal Reserve did enough over the past few months, which gives them the flexibility to cut later next year when a recession arrives. As for today, the fed is likely to deliver another 75bps rate hike and possibly another 50bps in December, but a hint about a pause or a slowing down is highly possible. The fed knows for a fact that mainstream cannot afford such high rates for a long time, but they will keep going until something breaks soon.
Equities showed a notable stabilization over the past few weeks, and the technical outlook is becoming more bullish than bearish ahead of the end of the year. We closed the majority of our JNJ long position issued last month at around $165, after reaching $175 a few days ago. At the same time, we issued AMD a long position for around $58.
We believe that even if the Fed delivers a hawkish tone today, any decline in the major indices will be limited and temporary. We are looking for a possible 5 to 10% rally before the end of November.
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