Stock markets in the United States are riding a “winning wave” as they ended the last eight trading sessions in the green. The last time this happened was two years ago. The stock supports market expectations that the rate hike cycle by the US Central Bank (Fed) is about to end. However, the imaginable Fed itself is more grounded.
The widely watched S&P 500 index, which is considered a general indicator of the state of the US economy, has gained more than six percent over the past eight days. On the contrary, the yields of US ten-year government bonds went down, which recorded the fifth decrease in the last six sessions due to the same expectation – that is, that the Fed already has its work “done”.
According to FedWatch, a tool that measures market expectations for Fed interest rate changes, markets currently see a 90 percent chance the central bank will again leave the key rate in the current range of 5.25 to 5.50 percent at its December meeting, up from 69 percent a week ago . With a probability of 83 percent, the markets conclude that the central bank will not change rates even at the meeting in January.
However, some comments by US central bankers in the last few days were in the tone that the door to further tightening of monetary policy is still open, even if the Fed decides to suspend interest rate increases for some time.
Bankers moderate optimism
For example, one of the top officials of the US central bank, Christopher Waller, said on Tuesday that the gross domestic product of the United States, which accelerated to 4.9 percent in the third quarter, represented a strong performance that is worth watching as the central bank considers its next steps. His colleague Michelle Bowman added that she takes the latest numbers on the health of the US economy as evidence that the economy not only “remained strong” but may have picked up speed, which calls for higher Fed rates.
The head of the Fed branch in Minneapolis, Neel Kashkari, dampened hopes for an early rate cut, which the markets are already speculating to some extent about. On the contrary, he said the central bank may have to do even more work to reduce inflation back to its two percent inflation target.
“When economic activity continues at such a high pace, it makes me question whether monetary policy is as tight as we assume,” he said in an interview with Bloomberg. Chicago Fed President Austan Goolsbee added to the comments by acknowledging the downward trend in inflation, but he said price pressures were not over yet.
While the fight against inflation in 1982 led to a recession in the United States, today the situation seems more favorable. There is a real possibility that the Fed’s tight monetary policy can reduce inflation to the targeted two percent while keeping unemployment at bay. This would bring about a so-called “soft landing” in the economic tussle, or avoiding a recession.
That is why the markets were anxiously waiting for the words that the head of the central bank, Jerome Powell, will speak on Wednesday on the occasion of the conference on the centennial of the Department of Research and Statistics of the Fed. Markets expected Powell to outline his current view on inflation, growth, employment and interest rates. But Powell did not comment on these topics.
Cooling in the labor market
Since last week’s central bank meeting, some fresh economic data has been released in the US that leans more in favor of keeping interest rates at current levels. For example, a key Labor Department statistic showed on Friday that the world’s largest economy added fewer jobs than expected last month, while the unemployment rate rose a tenth of a percentage point to 3.9 percent.
After three months when the labor market exceeded estimates, October came when the data were weaker than expected. In addition, even the previous data were revised for the worse in the case of employment. Thanks to this, the job market no longer looks so overheated.
“The strongest argument for the US central bank to ease its monetary policy is the fact that wage growth continues to be slow,” said economist Andrew Hunter of Capital Economics.
In October, the average hourly wage in the US rose by 0.2 percent compared to September to 34 dollars (781 CZK, in the Czech Republic the average hourly wage is about 320 CZK), while analysts expected a slightly faster growth. “It confirms the view that the Fed should not raise interest rates again,” Lazard analyst Ronald Temple said of the data.
“In our view, investors will be convinced after the October report that further rate hikes by the Fed are out of the question. Thus, speculations about the date when we will see the desired turn downwards are again fully in play. Of course, it wouldn’t be very good if the job market started to deteriorate rapidly. However, this will be verified in the next few months,” shares analyst Tomáš Vlk from Patria Finance evaluates the fresh data.