US close – Fed signals more hikes coming, Powell says disinflation process begun, ADP cools

US stocks went on a Fed rollercoaster ride; weakening after the statement suggested the Fed will stick to their rate hiking guns, but rallying after a dovish press conference that didn’t see Powell defend their dot plots and had him say for the first time that the disinflation process has begun. If the next couple of inflation reports show pricing pressures continue to ease, the Fed may finish this tightening cycle in March. Some may interpret this decision as dovish as they could have delivered a half-point increase today and emphasized they were still far from getting inflation back to target.

Fed

The Fed’s decision went as expected as policymakers downshifted again and signaled more rate hikes are coming. The Fed is sticking to their dot plots as inflation remains elevated.  They are acknowledging that inflation has eased but clearly a lot of work remains to get it closer to target. The Fed is worried about a reacceleration with inflation, which is justified considering how far inflation is from target.  The Fed is clearly telling markets that they are willing to overshoot here to make sure they conquer inflation. 

The initial reaction was a stronger dollar that had swaps price a peak rate just below 5.00%.  The Fed will have two more inflation reports before the March 22nd meeting and if disinflation trends hit a wall, the Fed’s dot plots of bringing rates between 5.00-5.25% may hold up.

Powell presser

Today, Fed Chair Powell decided to not put on his hawkish tie. Risky assets recovered after Powell expressed optimism with the disinflation process and did not show concerns over the recent easing of financial conditions.  Powell was Dr. Jekyll and Mr. Hyde as he tried to keep the door open for more tightening, but he kept talking about disinflation progress.  Powell still thinks he can still deliver a soft landing as he believes he can get inflation back to target without killing the labor market. Powell was rather dovish as he failed to convince markets that the December dot plots could still happen. Powell added that they don’t see a rate cut this year, but it appears no one is believing that.

ADP

The ADP employment report showed hiring declined in January, but some of that is due to the impact of weather-related disruptions. The private sector saw employment increase by 106,000 jobs in January, as pay growth remained flat.  The soft print was due to the impact of record floods in California and severe ice and snowstorms across central and eastern US.

Jolts

This could be troubling. Wage pressures won’t be going away anytime soon if job openings remain this elevated.  The December JOLTS report reminded us that employers are still struggling filling vacancies as job openings surged to 11.0 million from a month ago.  The labor market remains hot and this should support the Fed remaining aggressive with tightening.

After both ADP and Jolts data, expectations should still remain for a robust nonfarm payroll report.

ISM

The ISM manufacturing report was ugly. Manufacturing activity posted a worse decline and prices paid rose after a streak of nine straight monthly declines.  The headline manufacturing read fell from 48.4 to 47.4, a miss of the 48.0 consensus and the fifth straight decline.  The first half of the year could be brutal as demand-side indicators plunged as new orders slid and backlogs remained in contraction.

Oil

Crude prices declined after an ugly manufacturing report was followed by a massive build with stockpiles. The OPEC decision went as planned with a decision to keep their oil policy plan steady as they evaluate what happens with China’s demand and Russia’s output.

The EIA crude oil inventory report showed inventories rose to the highest levels since June 2021. Demand edged higher but more output is mitigating any tightness that is left. 

Oil remained near session lows after the Fed signaled more rate increases are coming.  The Fed is willing to overshoot with tightening and that means they are going to go above and beyond to bring down inflation, which could be a drag for growth over the short-term.

Gold

Gold was volatile after the FOMC decision. Gold dropped initially after the Fed raised rates and signaled more hikes are coming.  The weakness with gold was limited as we are clearly approaching the end of the Fed’s tightening cycle. Gold rallied after Fed Chair Powell decided to not go hawk on markets and said that the disinflation progress has begun.

The next big move for gold will come from the next round of inflation data.  The labor market still matters, but right now the Fed is not focusing that much with that part of the mandate.

Crypto

Bitcoin initially dropped after the Fed signaled policy will stay restrictive for some time.  Risk appetite is struggling today and that is dragging down crypto. If inflation continues to ease at a healthy pace, the bull case for crypto will remain.  Bitcoin turned positive as Powell didn’t fret over the recent easing of financial conditions.  Powell didn’t go full hawk and that gave many traders permission to pile back into risky assets. Bitcoin has massive resistance at the $24,000 level but if that is breached, momentum traders may try to keep the rally going towards the $26,500 region.