After eight months of continuous rate hikes with a large increase of 0.75% at every meeting, yesterday Fed Chair Powell gave some hint that the rate increases might be smaller from herein. This was something that got the same reaction from markets as a rate cut would.
S&P 500 closed 3% up which triggered an important level of Algo buying leading to a Market On Close (MOC) order of $11Bn buying making it the largest order this year till now. The other markets reacted similarly and the Fed rate swap markets raised the odds of 0.5% in the next meeting by 78% compared to 65% before the speech. It also marked the peak rate at 5% by May 2023.
This does bring the so-called Santa Rally early but will Santa stay till Christmas? It will be decided by the next couple of weeks as a lot of crucial data and events takes place. It starts with USA Payroll tomorrow and OPEC + meeting on 4th December just before the Europe embargo on Russian Oil starts from 5th December with price cap discussion ongoing.
The markets may have reacted in a manner that Fed Tightening is over or at least priced in some of that. But this might be the end of Part 1 where the interest rate impact was minimum. Part 2 begins now and will be in full swing by the first quarter of next year as interest rate starts impacting the economic data and at the same time crude oil supply tightens.
The second part which might last till Next Jackson Hole or the last quarter of 2023 will be more volatile in uncertain as “mild recession “ becomes the new “transitory inflation “