FedEx delivers a shock to fading bulls

Stocks had little chance of rising on Friday as a worrisome report from FedEx reminded investors that things are about to get dicey with the global economy. Consumer sentiment improved slightly offering a slight glimmer of hope for a soft landing.

Going as planned. Well, it is reckoning week, for the Fed and its market courtiers. The Fed has worked hard to send a loud and clear message that it is committed to ending inflation through aggressive tightening of monetary policy. To you and me that means, above all, higher… significantly higher interest rates. There has been much discourse over just how far and how quickly the Fed will raise rates. If the past several moves by the Central Bank are any indication, we can expect the Fed to stay fast to its plan.

The past several moves by the Fed include the bankers sending frightful verbal cues to the market causing swift and painful reactions. Once those estimates get baked into the market, the Fed must simply deliver the policy. You may recall earlier in the year how markets were expecting smaller, +25 basis-point hikes. Suddenly markets began to expect +50 basis-point moves, and those expectations came with swift selloffs in stocks and bonds. A greater than +25 basis-point move would have been considered unprecedented, but soon after overtures from Fed Governors, that larger move began to be baked into the market. That gave the Fed the all-clear it needed to make the once-unprecedented hike. Similarly, with the two +75 basis-point hikes that followed. Indeed, this week’s upcoming meeting was initially expected to feature a less-aggressive +50 basis-point hike. However, leading up to the meeting, probabilities for a larger +75 basis-point hike began to rise. Last week’s hotter-than-expected CPI release pushed the prospects for another +75 basis-point hike from the realm of possible to probable. According to Fed Funds futures a large +75 basis-point move is expected with 100% probability. What’s more, there is still the possibility that the Fed will hike a full percentage point, though those, odds are lower, at around 20%. This meeting’s outcome is not the only thing that has changed. Probabilities for future rate hikes have gone up as well. According to futures, markets are anticipating 2 more +50 basis-point moves beyond this week’s move. That would have Fed Funds futures ending the year around 4.25%. For the record, we have not seen those levels since 2007 when Fed Funds topped off at a slightly higher 5.25% just prior to The Great Recession. Futures, at the moment, are expecting rate hikes to end sometime in the second quarter of next year.

With all these probabilities and market expectations, however, they are just that… expectations. There is no telling what the Fed will actually do this upcoming Wednesday, or over the next few meetings, for that matter. We will, however, know with certainty once the Central Bank makes its pronouncement Wednesday afternoon. We will also, incidentally, get the Fed’s economic forecast, including its Dot Plot this upcoming Wednesday, as well. In those, we will see where Fed members themselves believe rates will be in the future. Additionally, Fed members will share their economic projections, including GDP, the Unemployment Rate, and inflation, all of which will influence the timing and the magnitude of future hikes. This will begin a new cycle of the Fed sending some clear messages to the market. The message will, as in the past, be quickly factored into the markets. Though the exact message is yet unknown, what is known is that we can expect much volatility leading up to this week’s announcement and beyond.

FRIDAY’S MARKETS

Stocks traded lower on Friday, unable to gain firm footing in the wake of a worrisome announcement by FedEx the night before. The S&P500 fell by -0.72%, the Dow Jones Industrial Average traded lower by -0.45%, the Nasdaq Composite Index declined by -0.90%, and the Russell 2000 Index dropped by -1.48%. Bonds fell and 10-year Treasury Note yields were unchanged at 3.44%. Cryptos gave up -2.50% and Bitcoin slipped by -0.51%.

NEXT UP

  • NAHB Housing Market Index (September) may have fallen to 47 from 49.
  • The week ahead: all eyes will be on Wednesday’s policy announcement, economic projections, and Chairman Powell’s presser. We will also get more housing numbers, the Leading Economic Index, and Manufacturing/Services PMIs. Please refer to the attached calendars for times and details.