Stock market investors may be gearing up for higher volatility in November. The US Federal Reserve is set to deliver another jumbo rate hike on November 2 and the next set of US CPI data for September gets announced on November 10. From a near-zero interest rate in early 2022, the year is most likely going to end with a rate hike of 425 basis points.
A 75 basis point in November and another 50 bps is what the market expects the Fed to deliver by the end of 2022. The fourth consecutive rate hike on November 2 is already absorbed by the market and may not come as a surprise to investors.
September CPI data will throw light on how inflation has been impacted on the back of a 300 basis points rate hike in 2022 so far. Meanwhile, the Fed is expected to remain fixed at its earlier stand which is to remain aggressive until inflation data shows signs of cooling down.
In order to tame 40-year high inflation, the US Fed is playing out its most aggressive tightening cycle in four decades. As a result, two key indicators are sending positive signals to the markets. Falling benchmark Treasury yields and dollar index numbers are hinting that the Fed’s aggressive policy is taking effect.
When will the Fed pause and when could there be a Fed Pivot, is something the market may not have answers to currently. Unless inflation falls to half from the current levels of above 8%, there may not be a Fed Pivot that the market is expecting.
Many economists are anticipating a modest recession to start in Q3 of 2023 as real growth will decline and the unemployment rate will increase significantly as the Fed continues its aggressive tightening to combat persistent inflation. Meanwhile, according to the advance estimate released by the Bureau of Economic Analysis, in the third quarter of 2022, the Real gross domestic product (GDP) for the US increased at an annual rate of 2.6 percent. The second estimate is awaited on November 30.
Fed Pivot may get discounted by the market sometime in early 2023 and the corporate earnings, margins, and future outlook of companies as a result of unprecedented rate hikes will hold the key for the market rally in 2023.