Fed is contemplating changing its ways but not making any promises

Stocks rallied yesterday because Jerome Powell said… hinted that it was OK. In reality, the Fed’s stance is unchanged, but their wait and see approach is a sign that it may be bringing its hiking chapter to a close.

Always possible, but maybe not probable. Ok, so the Fed chose not to raise interest rates in its latest policy meeting. Are you surprised? I hope not, because even if you are an occasional reader, you knew that the odds were against a hike this month. Even if you are not a student of probability, but you followed the markets closely, you would have probably (no pun intended) guessed that the Fed was going to remain on hold for now. So why even bother then? You don’t have to answer that question, it was rhetorical.

There are times when the Central Bank must act with purpose. Imagine driving a car, and a sharp turn appears out of nowhere. You jump into action, immediately pump the brakes, and wrench the steering wheel away from the curve (or is it into the curve ). The car… AND EVERYONE IN IT, are certainly made aware of the situation as they jolt forward then heave to and fro. If it were my car, a certain person in the passenger seat would likely vehemently object to my erratic driving . Bad situation avoided… for now. Now that you are aware that you are driving on a winding road, you are not likely to mash down on the gas pedal, turn up the volume on your radio and resume your earlier pace. You are likely to be highly vigilant going forward making minor adjustments, taking things slowly. That scene has been what the Fed has been like since late 2021 when it realized that the front right tire of the economy was quite literally hanging over the edge of a cliff, and 2022 became that knee-jerk and draconian reaction moment when the Fed swerved the car back into the center of the road. Now, throughout most of 2023, the Fed has been driving vigilantly.

Why not just always drive vigilantly? Because you would never get to where you are going. In economic terms, the economy would come to a grinding halt and cease to grow. Knowing all this, the Fed must decide when it would be appropriate to ease back in the seat and enjoy the beautiful scenery once again. That time would be obvious if the curves ended, and it was clear that we were on a straight passage. At this point, the sharp, switch-backed curves appear to be behind us, but there are still bends in the road, albeit shallower. Inflation is still too high! But wait, it looks like there may be some straight road off on the horizon.

Sorry for that long story, but I wanted to illustrate that the Fed’s behavior is anything but mysterious. It is clear that the Fed is still vigilant but its time for radical action is past. It would certainly not be appropriate for the Fed to hang its arm out the open window and speed up the vehicle just yet, but that time may be coming. Judging by Powell’s demeanor and careful choice of words yesterday, it became clear that the Fed is ready to ease back in the seat a bit. BUT NOT QUITE YET. The door for hikes is still very much open according to the Chairman, as he did his level best to avoid promising anything in December’s meeting. At this point, no one is expecting rate cuts, but an admission that the hikes are over is what the market is looking for. There was much discussion about the Dot Plot which displays Fed members’ projections for rates in the future. The last one showed that the bankers were expecting another +25 basis-point bump before the end of the year. However, those projections were made at a point in time (which has past), meaning they can change. We will get another Dot Plot when the Fed meets for its final meeting of 2023 next month. For now, it is still both hands on the wheel and maintaining the current speed. According to futures, there is only a 27% chance of hike by the end of this upcoming January. Those probabilities decay rapidly starting next spring, but while my eyes are fairly good (especially when I am wearing my specs ), I can’t see that far down the road, so I may as well stay vigilant myself, though I am going to want to change the station on the radio to something more upbeat… to keep me awake.

WHAT’S DRIVING IN THE PREMARKET

Starbucks Corp (SBUX) shares are higher by +4.98% after the company announced that it beat EPS and Sales estimates last quarter. The company attributes the beat to a greater amount of larger orders. In the past 30 days, 33% of analysts have modified their targets, 0 up, 11 down, and 22 unchanged. Dividend yield: 2.49%. Potential average analyst target upside: +17.9%.

PayPal Holdings Inc (PYPL) shares are higher by +6.54% after the company announced positive surprises in EPS and Revenues. The company affirmed current quarter guidance, still below estimates, but it did revise its full-year guidance higher and slightly above the consensus. While analysts are pleased with the results, they acknowledge that the company still has lots of work to do. Potential average analyst target upside: +52.0%.

YESTERDAY’S MARKETS

NEXT UP

• Initial Jobless Claims (October 28) is expected to come in at 210k, same as the prior week.
• Factory Orders (Sept) are expected to have increased by +2.3% after climbing by +1.2% in August.
• Durable Goods Orders (September) may have grown by +4.7%, in line with earlier estimates.
• After the closing bell earnings: Stryker Corp, Apple, Coinbase, Carvana, Opendoor, Block, Cloudflare, Draftkings, GoDaddy, Live Nation, Redfin, Paramount Global, Fortinet, Microchip Technology, Monster Beverage, and Bootbarn.