a ‘Fed Put’ is unlikely with inflation still hot

  • Stocks are likely to fall further in anticipation of another Fed rate hike, analysts said.
  • Investors priced in a more hawkish outlook for rate hikes after September’s strong jobs report.
  • The stock market is “just going to be collateral damage” in the fight against inflation, one analyst said.

Another big rate hike by the inflation-fighting Federal Reserve is imminent and stocks are likely to take further hits ahead of that move – but investors should shelve the idea that the Fed is looking to keep stocks away from steep declines.

After September’s payrolls report, investors were pricing in a more hawkish outlook for the likely Fed rate hike in November. The CME FedWatch tool showed an 82.3% chance of a 75 basis point hike, down from 75.2% a day earlier and higher than 56.5% a week earlier.

“I think the Fed feels like it has the license to move forward aggressively to fight inflation,” said Jan Szilagyi, CEO and co-founder of Toggle AI, a research firm in investment, to Insider after the Department of Labor released its payroll report on Friday. The United States created 263,000 new jobs in September, beating the average estimate of 250,000. The unemployment rate fell from 3.7% to 3.5%.

US stocks fell after the jobs report. The Nasdaq Composite lost nearly 4% and the S&P 500 fell nearly 3%.

“Today’s jobs report is unlikely to change the Fed’s calculus in its fight against inflation, which is still on track for another 75 basis point rate hike in early November.” , wrote Jason Pride, director of private wealth investments at Glenmede, in a note.

The report could lead to new lows in 2022 for stocks this month, Bank of America said on Friday.

The US stock market is already in a bear market, with the Nasdaq Composite down about 32% this year and the S&P 500 down more than 20%. The Fed has been aggressive in raising interest rates to bring down inflation which is around a four-decade high, which has left stocks in the red.

“On a variety of metrics, I think there are definitely still downsides, especially because I don’t think the Fed is trying to help the market. The Fed is focused on inflation, which is different certain other situations where you have an economic crisis or a financial crisis,” Szilagyi said, dismissing the idea of ​​a so-called “Fed Put.”

A Fed put refers to the belief among investors that US central bank policymakers will adopt policies aimed at helping stocks if they fall sharply and quickly to worrying levels. The market saw Fed puts in 1987, 2010, 2016 and 2018, according to the Corporate Finance Institute.

Szilagyi said “garden variety” bear markets dating back to the 1929 Wall Street crash lasted between 10 and 12 months and sent stocks down about 33%. The S&P 500 in the current downturn is down about 24% year-to-date.

“I do not think so [Fed policy makers] think the market has fallen so dramatically that they now suddenly have to pivot,” he said. “In 2018, when the market reacted very badly to the prospect of a potential tightening, they actually priced in the market. But that was back when inflation was not a problem. I think now you’re in exactly the opposite situation where inflation is suddenly a problem and the market is just going to be collateral damage.”

Szilagyi also said stocks appeared to have fallen on Friday as investors brushed off the notion that signs of potential stress in financial systems would lead the Fed to reverse rate moves, including concerns over the health of the Swiss lender. Credit Suisse and the Bank of England’s emergency £65 billion bond market intervention.

“This glimmer of hope that there might be a small pivot – which bears no resemblance to any real easing of monetary policy – ​​is being assessed. We are retesting the June lows, which, in ultimately, is something we probably have to do anyway if there is ever hope of a major bottom in the market.”

The September inflation report is due to update Thursday’s August headline reading which came in at 8.3%. The Fed is expected to raise rates for the sixth time at its Nov. 1-2 meeting to bring the fed funds rate up from the current 3% range to 3.25%. The Fed has raised the benchmark rate by 75 basis points in its last three meetings.

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