Tag: Beige Book

Wall Street Under Pressure as Fed Rate Uncertainty Weighs

Posted on by slightbourne@noblecapitalmarkets.com

Investors were squarely focused on the Federal Reserve’s next moves on interest rates as Wall Street kicked off the new week on a sour note. The major indexes pulled back on Wednesday, with the Dow Jones Industrial Average sliding nearly 1% to its lowest level in nearly a month.

The culprit? Rising Treasury yields across the board as expectations get muddled on when exactly the Fed will start cutting rates and by how much. The yield on the 10-year Treasury note climbed to a four-week high after an unexpectedly strong reading on U.S. consumer confidence.

This hits right at the heart of the stock market’s biggest preoccupation of late – will the Fed’s rate hiking campaign successfully tame inflation without severely denting economic growth? The conflicting signals have investors scratching their heads and selling stocks.

The tech-heavy Nasdaq retreated from Tuesday’s milestone close above 17,000, with pressure on megacap names like Microsoft, Alphabet, and Meta. The semiconductor index, a recent leadership group, dropped nearly 2%. Small-caps also got hit hard as the Russell 2000 fell over 1%.

Treasury yields climbing is a negative for valuations, especially in richly-valued sectors like tech. The CBOE Volatility Index (VIX), Wall Street’s fear gauge, spiked to its highest level since early May as rate concerns contributed to the market’s unease.

Investors began 2023 pricing in rate cuts as early as March, but sticky inflation readings and hawkish Fed rhetoric have walked back those expectations. According to the CME’s FedWatch Tool, traders are now only betting on a 25 basis point cut by November or December at the earliest.

The Fed’s “Beige Book” released Wednesday afternoon provided little clarity, depicting an economy expanding at a modest pace with elevated price pressures. Traders are now laser-focused on Friday’s Personal Consumption Expenditures (PCE) data, which is the Fed’s favored inflation metric.

Amid the cross-currents, there were pockets of strength driven by solid corporate news. Marathon Oil surged 8.7% after ConocoPhillips announced a $15 billion all-stock acquisition of the energy firm. DICK’S Sporting Goods and Abercrombie & Fitch also rallied double-digits after boosting their annual guidance.

But the broader market sold off, with declines across all eleven S&P 500 sectors. The airline industry was a notable laggard, with an airline stocks index tanking over 4% after American Airlines slashed its profit forecast.

For now, uncertainty continues to breed anxiety on Wall Street as investors attempt to gauge whether the Fed can orchestrate a long-hoped-for “soft landing” or if more turbulence is in store. All eyes will be laser-focused on upcoming inflation data and Fed speak for further clues on the path forward for interest rates.

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The Beige Book Has Some Gray Areas

Posted on by phoffman@channelchek.com
January Fed Summary

Attention is Now Being Paid to the Beige Book

The so-called Beige Book is receiving much more attention from market participants than it has in years as they seek insight into the near- and long-term economic direction. The report is published eight times yearly and released about two weeks before the FOMC scheduled meetings. It contains anecdotal trends and moods from each of the 12 Federal Reserve districts. The information is collected and summarized and is relied on as part of the discussion topics at the Fed policy meetings.

The report released on January 18th was collected on or before January 9th. While each Federal Reserve district may have different economic experiences, for example, manufacturing regions may have a very different perspective than agricultural areas or districts where service jobs are more prevalent.

30,000 Foot View

The first Beige Book of 2023 shows the US economy is holding steady. However, there are only small amounts of growth experienced in some regions, while others expect small pockets of expansion. This overall summary would be difficult to use as an argument for the Fed to alter course from its stated intention of additional tightening, including Fed Funds rate hikes. The next meeting will be held on January 31st and February 1st.

“On balance, contacts across districts said they expected future price growth to moderate further in the year ahead,” the survey said.

The report doesn’t contain many surprises and confirms current expectations that residential real estate activity is sluggish, the labor market is strong, and that inflation is running at a slower pace of growth.

There is very little in January’s Beige Book that would alter analysts’ expectations of what the next monetary policy adjustment might be. Those that are expecting a 0.50% increase are not likely to shift their thinking from the summaries, and those expecting a 0.25% hike are similarly not inclined to shift their thinking. Most analysts fall into one of these two categories.

A Sign the Markets Wanted

In a recent interview, Cleveland Fed President Loretta Mester said the slowdown in inflation shows the Fed’s work raising rates is having the desired effect; she also suggested that further increases are still needed. “We’re beginning to see the kind of actions that we need to see,” Mester stated; these are “good signs that things are moving in the right direction. That’s important input into how we’re thinking about where policy needs to go.” This is heartening for those hoping for fewer rate hikes as Mester is considered one of the US central bank’s more hawkish members.

Take Away

The markets got a mixed bag with no clear change of direction from the summary of Federal reserve districts, otherwise known as the Beige Book. This could mean there will be few surprises at the close of the FOMC meeting on February 1st.

At least one Fed hawk is softening her rhetoric going into the meeting. If the trend continues, the prospect of fewer rate hikes should be viewed as positive for stocks and positive for bonds.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/monetarypolicy/beigebook202301.htm

https://www.federalreserve.gov/monetarypolicy/publications/beige-book-default.htm

https://www.usnews.com/news/economy/articles/2023-01-18/feds-beige-book-finds-economy-holding-steady-with-little-growth-expected-in-the-coming-months