Wall Street in plaster, awaiting the speech that Fed Chairman Jerome Powell will deliver with a speech at the Brookings Institution. Powell’s words could shed greater light on the extent of the next rate hike by the American Central Bank.
The FOMC, the monetary policy arm of the Fed, will meet on December 13 and 14 to announce its new anti-inflation tightening. After four maxi rate hikes of 75 basis points, Powell could announce, according to some economists, a lower tightening of 50 basis points.
“This is a Fed-created recession; as a result, when they (Powell & Co) pivot, the market should go very fast,” said Steve Grasso, CEO of Grasso Global, speaking on CNBC’s “Fast Money”.
However, the data that arrived today from the macro front provided mixed signals.
The first revision of US GDP for the third quarter has been announced: the figure has been revised upwards from the +2.6% initially announced with the preliminary reading to growth of 2.9%. GDP thus confirmed the solidity of the United States economy despite the aggressive rate hikes launched by the Fed. Looking at the components of GDP, the growth in consumer spending was revised upwards from +1.4% to +1, 7%; the growth of the core component of the personal consumer price index (core PCE – the parameter preferred by the Fed to monitor the inflation trend) also improved, rising by 4.6% in the third quarter, compared to +4, 5% initially reported.
The data on the US GDP is positive: but this very factor could unnerve the markets, which are hoping for signs of a slowdown in the economy and therefore of inflation, which will lead the Fed to launch monetary tightening on a smaller scale than the mega rate hikes 75 consecutive basis points pitched to date.
In this sense, an indication of the slowdown in the US economy came from the ADP report, relating to the creation of new jobs in the private sector and referring to the month of November:
the data showed that the US economy created 127,000 new jobs in the private sector, well below the 200,000 Bloomberg consensus and the 239,000 jobs created in the previous month. This is the smallest increase since January 2021.
“Inflection points can be hard to capture in the labor market, but our data suggests that Federal Reserve tightening is impacting job creation and rising wages,” said Nel Richardson, chief economist of ADP. “Plus, companies are no longer in hyper-substitution mode. Fewer people are quitting and the post-pandemic recovery is stabilizing.”
Speaking of the Fed, while awaiting the speech of number one Jerome Powell, Elon Musk, new owner and CEO of Twitter and also number one of Tesla and Space X made his voice heard. The Fed, Musk said, risks to “magnify the likelihood of a severe recession” in the US unless it cuts interest rates immediately.
“The Fed needs to cut rates immediately,” said Elon Musk, who has been in the eye of the storm since completing his $44 billion takeover of Twitter in late October due to his wacky tweets and criticism against everything and everyone.
It must be said that, although US inflation has slowed down, the Fed has yet to have proof that the weakening of price growth is sustainable. Not to mention that, at a 7.7% year-on-year growth rate (based on US inflation as measured by the consumer price index), the CPI remains well above the 2% inflation target of the Federal Reserve.
Among other things, two days ago James Bullard, president of the St Louis Fed, known for being a hawk of the American central bank, said that “the markets are underestimating the risk that the Fomc (the monetary policy arm of the Fed) could be more aggressive” in raising fed funds rates. “Rates need to be higher for inflation to come down,” Bullard said, adding that “we have different ways to intervene.”
“Interest rates will not fall as the markets would like – underlined the president of the St. Louis Fed, dampering the hopes of those who are already looking at Powell’s Fed’s about-face, and therefore at US rate cuts.
Bullard explained that the possible creation of 200,000 new jobs in November – which should emerge from the US employment report, scheduled for Friday 2 December, this week’s major market mover – would still be confirmed as well above historical trends “.
Among other things, “GDP seems to point to very strong growth in the fourth quarter”. Which means that the American economy would not have slowed down enough to make the weakening of inflation sustainable. On November 2, the Fed raised US fed funds rates by 75 basis points for the fourth consecutive time, to a new range of between 3.75% and 4%, a record since 2008.