By Isabel Wang and Steve Goldstein
U.S. stocks were mostly higher on Friday morning as traders shook off fears that the Federal Reserve could raise the benchmark interest rate to a higher-than-expected level, while options contracts are set to expire.
On Thursday, the Dow Jones Industrial Average fell 8 points, or 0.02%, to 33546, the S&P 500 declined 12 points, or 0.31%, to 3947, and the Nasdaq Composite dropped 39 points, or 0.35%, to 11145.
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U.S. stocks opened higher on Friday after a down session on Wall Street following hawkish comments from St. Louis Fed President James Bullard, who said the fed funds rate may have to climb as high as 7% to restrict economic growth enough to fight inflation.
“Bullard’s vocal view that rates need to get to 5-7% was intended to bend the Fed Funds implied curve so cuts priced by investors for the second half of 2023 are priced out. As has been the case throughout 2022, hawkish rhetoric (Jackson Hole, anyone?) creates equity market volatility,” said strategists at Evercore ISI.
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Andrew Hollenhorst, chief US economist at Citi Research, was not surprised by Bullard’s remarks as his statement is supported by the data — “the Atlanta Fed’s dashboard of underlying inflation metrics are all running above 4.7%, suggesting that policy rates will need to reach above 5% for real rates to be meaningfully positive.” That is a condition both Fed Chair Powell and Vice-Chair Brainard have agreed on as a requirement for restrictive monetary policy, Hollenhorst said in a note on Friday.
The Minneapolis Fed’s Neel Kashkari also said on Thursday that the central bank needs to keep raising interest rates until it is sure inflation has hit a ceiling, and it can’t be overly persuaded by one month’s number.
“It’s an open question of how far we are going to have to go with interest rates to bring that demand down in the balance,” he told the Minnesota Chamber of Commerce in an event webcast on Thursday.
Bond yields continued to climb on Friday, with the Fed policy-sensitive 2-year Treasury yielding 4.446%, while the yield on the 10-year Treasury increased 2.4 basis points to 3.795%.
In U.S. economic data, existing-home sales fell 5.9% to a seasonally adjusted annual rate of 4.43 million in October. The level of sales is the lowest since December 2011 excluding the 2020 pandemic and this is also the ninth straight monthly decline in sales, the longest streak on record.
The U.S. leading economic index (LEI) fell 0.8% in October, the eighth straight decline in the leading index, the Conference Board said Friday.
“The downturn in the LEI reflects consumers’ worsening outlook amid high inflation and rising interest rates, as well as declining prospects for housing construction and manufacturing,” said Ataman Ozyildirim, senior director of economics at the Conference Board. “The Conference Board forecasts real GDP growth will be 1.8 percent year-over-year in 2022, and a recession is likely to start around year-end and last through mid-2023.”
See:A year after the Nasdaq peak, why stocks could rally from here
David Donabedian, chief investment officer of CIBC Private Wealth US, thinks the stock market is in the final phase of the bear market bottoming process, as the equity market could get better even though there will be more weakening in the economy and a likely recession in the first half of next year.
“The markets don’t wait for the clouds to part and the sun to come out. A bull market often starts in the midst of a recession, and that may be the story in the first half of 2023,” Donabedian said. “(The bottoming process) could certainly take a while and we will see more challenging days and weeks ahead. But the good news is that equity investors are getting more comfortable with the direction of monetary policy and the reality that the Fed will take rates to 5% or even a little higher.”
There’s also some $2.1 trillion of options that expire, according to data from Goldman Sachs.
Read:Here’s another reason softer inflation may be a game-changer for stocks: the dollar may finally have peaked
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