Hopes For A Fed Pivot Dashed

Good news on the economy remains bad news for Wall Street.

At the starts of the week, the market rebounded on Monday and Tuesday until then Friday’s September jobs report released spooked investors into selloff.

The "bad news is good news" mentality prevailed in the market with every disappointing news to be accompanied by a rally.

Recently released data showed that US manufacturing activity slowed in September and job vacancies fell sharply in August, raising hopes that a weaker economy and a slowdown in the labor market could mean slower inflation and expected fewer Fed interest rate increases. The S & P 500 rose 5.7% on Monday and Tuesday, its biggest 2-day gain since April 2020.

Then, the following hawkish comments from Fed officials, strong service sector data and Friday's jobs report all suggest that the economic performance and job markets is not enough to support an end to Fed tightening. The S&P 500 then fell 4% from Tuesday's high and is up just 1.51% this week, with the Dow rose 1.99% and the Nasdaq gained 0.73%.

Mark Cabana, Head of US interest rate strategy at BofA Securities, said: "Investors may want policy to shift, but they cannot use hope as a strategy, and investors still underestimate the degree of policy tightening and labour market cooling needed to keep inflation down.

Data released on Friday showed that non-farm payrolls increased by 263,000 in September, and the unemployment rate fell to 3.5%, hitting a nearly 50-year low, indicating that the US labor market is still strong and once again undermining market expectations of a shift in Fed policy.

Although job creation in September was down from 315,000 in August and 537,000 in July, the Fed will not believe that the labour market is weak enough with the unemployment rate still at a half-century low. It is still possible to raise interest rates by another 75 bps at its November policy meeting, pushing the top end of the target interest rate range to 4.0%.

Jason Draho, Head of Asset Allocation for the Americas at UBS Global Wealth Management said: "The market environment remains the same this year. As long as inflation is high and the labour market is tight, the Fed will continue to tighten policy to cool the economy and the market will continue to fluctuate sharply. "

According to BofA, a large number of investors seem to be hoarding cash, perhaps expecting better buying opportunities in the future. Cash inflows totaled $88.8 billion in the week to October 5, the highest level since April 2020, with outflows of $18.2 billion from bond funds and $3.3 billion from equity funds. One day all this cash will have to be invested.

But for now, macro and micro news will continue to affect market sentiment.The 3rd quarter earnings season will start next week, with big US banks reporting results first, as well as important consumer price index (CPI) data for September next Thursday.

But Friday’s jobs report released may have dashed such hopes for a Feb pivot.