Fed likely to discuss next week when to halt hikes, Journal report says
Federal Reserve officials next week are almost certain to approve another deceleration in interest rate hikes while also discussing when to stop the increases altogether, according to a Wall Street Journal report.
The rate-setting Federal Open Market Committee is set to convene Jan. 31-Feb. 1, with markets pricing in almost a 100% chance of a quarter-point increase in the central bank’s benchmark rate. Most prominently, Fed Governor Christopher Waller said Friday he sees a 0.25 percentage point increase as the preferred move for the upcoming meeting.
However, Waller said he doesn’t think the Fed is done tightening yet, and several other central bankers in recent days have backed up that notion.
The Journal report, citing public statements from policymakers, said slowing the pace of hikes could provide the chance to assess what impact the increases so far are having on the economy. A series of rate hikes begun in March 2022 has resulted in increases of 4.25 percentage points.
Market pricing is currently indicating quarter-point hikes at the next two meetings, a period of no action, and then up to a half-point reduction by the end of 2023, according to CME Group data.
However, several officials, including Governor Lael Brainard and New York Fed President John Williams, have used the expression “stay the course” to describe the future policy path.
— Jeff Cox
The Nasdaq Composite rallied more than 2.2% during midday trading Monday, lifted by shares of beaten-up technology stocks.
The move put the tech-heavy index on pace for a consecutive day of gains exceeding 2%. The index finished 2.66% higher on Friday.
Rising semiconductor stocks helped pushed the index higher. Tesla and Apple, meanwhile, surged 7.7% and 3.2%, respectively, as China reopening lifted hopes of a boost to their businesses. Western Digital and Advanced Micro Devices rose about 8% each, while Qualcomm and Nvidia jumped about 7%.
Information technology was the best-performing S&P 500 sector, gaining 2.7%. That was in part due to gains within chip sector. Communication services added 1.9%, boosted by the likes of Netflix, Meta Platforms, Alphabet and Match Group.
— Samantha Subin
El-Erian says Fed should hike by 50 basis points, calls smaller increase a ‘mistake’
Surging inflation may appear largely in the past, but a shift to a 25 basis point hike at the next Federal Reserve policy meeting is a “mistake,” according to Allianz Chief Economic Adviser Mohamed El-Erian.
“‘I’m in a very, very small camp who thinks that they should not downshift to 25 basis points, they should do 50,” he told CNBC’s “Squawk Box” on Monday. “They should take advantage of this growth window we’re in, they should take advantage of where the market is, and they should try to tighten financial conditions because I do think that we still have an inflation issue.”
Inflation, he said, has shifted from the goods to the services sector, but could very well resurge if energy prices rise as China reopens.
El-Erian expects inflation to plateau around 4%. This, he said, will put the Fed in a difficult position as to whether they should continue crushing the economy to reach 2%, or promise that level in the future and hope investors can tolerate a steady 3% to 4% nearer term.
“That’s probably the best outcome,” he said of the latter.
— Samantha Subin
An earnings recession is imminent, according to Morgan Stanley
An earnings recession is imminent this year, according to Morgan Stanley equity strategist Michael Wilson.
“Our view has not changed as we expect the path of earnings in the US to disappoint both consensus expectations and current valuations,” he said in a note to clients Sunday.
Some positive developments have unfolded recent weeks — such as China’s ongoing reopening and falling natural gas prices in Europe — and contributed to some investors viewing market prospects more optimistically.
However, Wilson advises investors to remain bearish on equities, citing price action as the main influence for this year’s rally.
“The rally this year has been led by low-quality and heavily shorted stocks,” he said. “It’s also witnessed a strong move in cyclical stocks relative to defensives.”
Wilson has based his forecasts on margin disappointment, and he believes the case for this is growing. Many industries are already facing revenue slowdowns, as well as inventory bloating, less productive headcount.
“It’s simply a matter of timing and magnitude,” said Wilson. “We advise investors to stay focused on fundamentals and ignore the false signals and misleading reflections in this bear market hall of mirrors.”
— Hakyung Kim