Federal Reserve Preview: Stocks in Trouble if the FOMC Dials Up Hawkish Tone
By:Ilya Spivak
Wall Street bleeds out as employment cost data tops expectations.
The priced-in Fed outlook now questions seeing even one rate cut in 2024.
The FOMC policy decision and Jerome Powell’s press conference are now in focus.
Stocks swooned on the final day of April as Wall Street looked ahead to a much-anticipated monetary policy announcement from the Federal Reserve’s rate-setting Federal Open Market Committee (FOMC).
The bellwether S&P 500 equity index is on pace to close with a loss of over 1%. The tech-tilted Nasdaq and the small-cap Russell 2000 face heavier selling, tracking 1.3% and 1.5% lower into the final hours of the session. The blue-chip Dow Jones Industrial Average splits the difference with a loss of close to 1.2%.
The selloff began as first-quarter U.S. Employment Cost Index (ECI) data came across the wires. It showed that labor costs rose 1.2%, topping expectations penciling in a rise of 1% and marking the largest increase in a year. That amounted to a rise of 4.2% year-on-year, matching the fourth quarter and breaking a two-year disinflation trend.
Financial markets responded with a hawkish shift in the priced-in monetary policy outlook. Fed funds futures are now pricing in just 23 basis points (bps) in rate cuts for 2024. This means the probability of even a single rate cut has been called into question, though the likelihood of a reduction by the end of the year is still a commanding 92%.
All eyes now turn to Fed Chair Jerome Powell and company.
The ECI figures are just the latest in a series of hotter-than-expected inflation measures eating into stimulus bets. Consumer price index (CPI) and personal consumption expenditure (PCE) figures—the quarterly version baked in into gross domestic product (GDP) reporting as well as the monthly gauge—have told a similar story.
Comments from Fed officials in recent weeks have started to signal a hawkish rethink is afoot. For stocks, the downside risk lurks in the possibility that policymakers will open the door for scrapping rate cuts altogether, or even suggesting a hike in rates this year has become a live consideration.
Wall Street may cheer if central bank officials opt for a softer adjustment, signaling that scope for easing has diminished but maintaining that some amount of cutting remains likely this year. That much seems to be priced in already, and stopping there may be a relief for traders.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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