Author: PSE Trading Trader @Christine

Market Reaction: Shock 😲😲😲

The market took a 2% tumble after Powell’s hawkish message, which was pretty much what we expected. He talked about cooling inflation, strong growth, and a commitment to keeping rates high to keep inflation risks in check. Sure, higher rates might spook equities in the short term, but the tweaks in the Summary of Economic Projections (SEP) could be a boon for the stock market in the medium term. The market’s knee-jerk reaction was a spike in rates and a dip in equities.

Powell’s stance: soft landing should not be base case.

Powell: “I’ve always thought that the soft landing was a plausible outcome…ultimately, this may be decided by factors that are outside our control at the end of the day, but I do think it’s possible.”

Dot Plot Drama and Economic Projections

The FOMC kept its 2024 core PCE forecast at 2.6%, trimmed 2023 to 3.78%, and bumped up its real GDP outlook to 1.5% from 1.1%. This “soft landing” combo was pretty much what investors were expecting and is seen as a medium-term plus for stocks. The FOMC kept one rate hike on the table for the rest of 2023 and nudged the median 2024 dot up to 5.1%, while the long-term dots stay put at 2.5%. The upward shift in dots is a slight counterbalance to the positive growth revisions.

Powell’s Presser and the Fed Funds

Fed Funds stayed the same, and the odds for a rate hike in November moved up to about 35% from 25% before the meeting. The market is more worried about the longer-term rates outlook. During the press conference, Chair Powell stressed data dependence and preserving optionality, which took the edge off the hawkish message from the dots. The base case remains modestly positive, with Growth/Tech as the preferred long exposure.

Shutdown Showdown: Risks and Market Exposure

The US government is staring down the barrel of a shutdown on September 30th unless Congress gets its act together. Recent events, like the House failing to table a vote on a continuing resolution (CR) and the defeat of a motion to proceed with the defense spending bill, have ramped up these risks. While the overall macro risks from a shutdown are likely limited in the near term, stocks with high exposure to government spending might feel the pinch.

BTC: Still Bullish, Despite the Bears 🚀

Despite the hawkish message, I’m still bullish. After market recovers from “shock”, investors will definitely bounce back and focus on the positive economic data:

US Jobless Claims Fall to 201,000, Lowest Level Since January

In a pleasant surprise, the U.S. jobless claims for the week of September 16th actually went down, instead of the slight increase everyone was expecting. They dropped from 221k to 201k. The average over the last four weeks also decreased. What’s more, the number of people continuing to claim jobless benefits fell to 1662k from 1683k in the week of September 9th. When we look at the data from each state, we see that only 14 states had an increase in seasonally adjusted initial claims. This drop in initial claims, the lowest we’ve seen since the start of the year, really highlights how strong and tight the job market is right now. It suggests that we’re likely to see solid job growth that could push the unemployment rate down even further.

Economic Activity: Still Strong

Last week’s economic data shows that real economic activity is still going strong. Retail sales data beat expectations, PMI reports were solid, and weekly jobless claims stayed low, showing a healthy economy and no uptick in layoffs. There were no signs of economic weakness on the inflation side, which came in a bit hotter than expected but not high enough to push the Fed to hike rates at the recent FOMC meeting.

Oil Prices and Inflation: Impact on the Economy

The surge in oil prices is leading to higher gas prices, which will definitely hit consumption. But, as the U.S. is now a big producer of oil and pretty much energy independent, there are winners to balance out the losers. Economic bears are looking at these price gains and see higher oil prices driving headline inflation to +0.6% for August, while core inflation came in only at +0.2%. Despite worries about the Fed and inflation, the market direction and narrative are more focused on the strength of the economy and corporate profits over the next six months.

Some Risks: Strikes, Shutdowns, and Market Momentum

The union strike from the United Auto Workers might last longer than expected, and the government shutdown looming for October could deliver a moderate blow to the economy.

But the market is looking past the disruption and political posturing coming out of Washington and is keeping its positive momentum, potentially leaning upward towards the end of the year. Tech stocks’ performance is still strong until their earnings disappoint, and the successful IPO of Arm Holdings last week shows a healthy reopening of the IPO markets and a continued appetite for risk.