US Fed Pivot Expectations Rise Again, Why?... Wall Street Warns "Bottom Is Far Away"

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] As the US New York stock market continues its rally for the second day, some market participants are beginning to harbor so-called 'pivot' expectations that the central bank, the Federal Reserve (Fed), might shift its tightening policy. The recent surge in global financial market instability, including Credit Suisse's liquidity crisis, along with the Reserve Bank of Australia's smaller-than-expected rate hike, has fueled these hopes. On the other hand, Wall Street is also flooded with warnings that "pivot expectations are premature" and "will bring greater pain."

◆ New York Stock Market Rally... Spreading Fed Pivot Expectations

On the 4th (local time), the resurgence of pivot expectations in the financial market is attributed primarily to the growing instability in global financial markets and signs of economic slowdown confirmed in recent economic indicators. Following the slowdown in the manufacturing index released by the Institute for Supply Management (ISM) the previous day, the US Department of Labor announced that August job openings plunged by a staggering 10% compared to the previous month?the largest decline since April 2020.

Effek Ozkadeskaya, Chief Analyst at Swissquote Bank, evaluated that the US ISM manufacturing index released the day before showed a slower-than-expected expansion, serving as an important signal for many investors to believe that the Fed's high-intensity tightening would be difficult to sustain. Additionally, cooling signs were confirmed even in the 'strong labor market' that had supported the Fed's aggressive tightening, further strengthening pivot expectations.

The Reserve Bank of Australia's rate decision also played a role in sharply raising pivot expectations that day. The Reserve Bank of Australia decided on a 0.25 percentage point hike, falling short of the market's initial forecast of 0.5 percentage points. It cited the recent rapid increase in policy rates to a considerable level as the reason for slowing the pace. Consequently, the market spread expectations that the Fed, which has raised rates by a total of 3 percentage points this year, might also soon slow down like Australia.

The US 10-year Treasury yield, which briefly surpassed 4% last week, has also significantly declined this week. It even dropped to as low as 3.56% during intraday trading. The US dollar showed weakness for five consecutive trading days. The dollar index, which had surged to 114.78 immediately after the UK’s tax cut announcement last week, exacerbating global financial market anxiety, fell to 110.18 that day.

Billionaire investor Barry Sternlicht, CEO of Starwood Capital, criticized, "The Fed's tightening is wrong. It will cause a disaster," and pointed out, "They need to move more slowly and pay closer attention to economic data."

Since the beginning of this year, simultaneous high-intensity rate hikes by the Fed and other major central banks have heightened caution in global financial markets. Experts are concerned about the recent UK-originated financial market instability and Credit Suisse's liquidity crisis as representative weak links amid soaring interest rates and plummeting asset prices.

Bank of America (BoA) warned, "Central banks are losing credibility as they fail to properly handle inflation," expressing concerns about a situation where market trust collapses and leads to bankruptcy risk, similar to Bear Stearns in the past. Previously, the credit default swap (CDS) rates reflecting Credit Suisse's default risk soared to record highs. Economists pointed out, "This is a case where vulnerable companies are pressured amid financial tightening and recession fears," adding, "The next weak link may also emerge."

◆ "Premature" Warnings... Higher Bets on Giant Step in November

However, since the Fed, which is fighting inflation, has repeatedly conveyed messages that it is prepared for economic slowdown, voices saying it will not easily shift policy are growing louder.

The Fed is widely expected to raise the benchmark interest rate by 0.75 percentage points at the November meeting as well. This would mark the fourth consecutive giant step. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market currently reflects more than a 62% chance of a Fed giant step next month. Even as pivot expectations are quietly spreading in some parts of the market, the betting on a giant step has actually increased compared to the previous day.

Former Fed Chair Roger Ferguson said, "Pivot expectations are premature," pointing out, "There is a disconnect between market hopes and the Fed's reality." Philip Jefferson, the new Fed board member, also confirmed the Fed's commitment to further tightening, stating that inflation remains the most serious issue currently faced. He said, "Signs of easing inflation are visible, but it will take more time to bring it down to the target," and mentioned that economic growth could fall below the long-term average during this process.

Mary Daly, President of the Federal Reserve Bank of San Francisco, also emphasized that restrictive policies must be maintained until inflation is fully lowered. Regarding global concerns raised by the recent dollar strength due to rate hikes, she added that the Fed's policy priority remains the United States.

◆ Wall Street Downgrades Forecasts, Predicts Further Market Declines

Wall Street investment banks have been lowering their year-end S&P 500 forecasts one after another. On this day, HSBC cut its year-end S&P 500 index forecast from 4450 to 3500, which is more than 7% below the closing price that day. Max Ketner, HSBC Multi-Asset Strategist, pointed out, "The S&P 500 index could be pressured below the 3200 level in the fourth quarter." HSBC also diagnosed that the possibility of a US recession is increasing.

The day before, Credit Suisse also lowered its year-end S&P 500 forecast to 3850, 10% lower than before. Citi cut its forecast from 4200 to 4000. Earlier last month, Goldman Sachs adjusted its forecast from 4300 to 3600. Mike Wilson of Morgan Stanley, one of Wall Street's leading pessimists, predicted the S&P 500 index would range between 3000 and 3400 by the end of this year or early next year.

Nicholas Colas, co-founder of DataTrek Research, warned that the recent rally in the New York stock market could actually signal greater pain ahead for the market. Holly Newman Croft, Senior Advisor at Neuberger Berman, also said the current rebound "is no different from the summer rally," and predicted, "The market will not recover until the Fed signals it will stop raising rates."

Meanwhile, on this day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average rose 2.8% from the previous session, reclaiming the 30,000 level for the first time since September 22. The large-cap-focused S&P 500 index closed up 3.06%, and the tech-heavy Nasdaq index rose 3.34%. As a result, all three major indices have rebounded more than 5% from their yearly lows. The S&P 500 index's two-day gain in October reached a remarkable 5.7%.