Fed Changes Rhetoric | Daily Market Analysis

Key events:

Eurozone – ECB Publishes Account of Monetary Policy Meeting

Last night the minutes of the November FOMC meeting were published.

The main thing - the US regulator made it clear: there is a willingness to slow down the pace of rate hikes.

​

The market reacted to the protocol, though without excessive enthusiasm:

▪️ The S&P 500 Index rose 0.60 percent,

▪️ Dow Jones Industrial Average was up 0.28%,

▪️ NASDAQ Composite up 0.99%,

▪️ Gold jumped about $20 to the 1755 level.

▪️The DXY index was down a bit more to the 105.7 level.

​

There are two main reasons for the change in rhetoric:

▪️ lower inflationary pressures and

▪️ the threat of the U.S. economy sliding into recession.

According to the latest data, business activity in the U.S. manufacturing sector declined in early November to 47.6 from 50.4 in October. In addition, the number of jobless claims in the U.S. rose by 240,000.

Here's the real deal, right on schedule. The Fed's tightness has caused a serious drag on the economy.

Overall, the Organization for Economic Cooperation and Development (OECD) predicts the global economy will slow to 2.2% in 2023 after the 3.1% expected this year. Economic growth in the eurozone will decline even more sharply, from 3.3% in 2022 to 0.5% next year. The Fed's tightness is causing other regulators to gesture in the name of avoiding a failure of their currencies and fighting inflation.

What's disconcerting? Recent speeches by Fed members. For instance, Mary Daley, president of the San Francisco Fed, said that the U.S. central bank's discount rate could be in the 4.75%-5.25% range soon enough. Loretta Mester, president of the Federal Reserve Bank of Cleveland, said in turn that the regulator needs more "good news" for softening the monetary policy.

As a reminder, the inflation target is 2%, so markets are pricing in a few more rate hikes in 2023.

This scenario does not bode well for the corporate sector. Companies will have to cut costs, including through layoffs, to maintain net profit margins. And analysts will continue to change the discount coefficients on securities at each rate hike, recommending investors to sell securities in general.

Stats released Wednesday showed a larger-than-expected increase in U.S. jobless claims last week, as well as the highest increase in durable goods orders in 4 months in October and an unexpected rise in new home sales.

The U.S. observes Thanksgiving today, so there will be no trading on the stock market. The next day (Black Friday) trading will close earlier than usual.