Red-Hot October in a Cool-Down Phase

Articles From: Briefing.com
Website: Briefing.com

By:

Chief Market Analyst

The equity futures market trading lower today isn’t causing too much of a stir, not with other reports pointing out that the Dow Jones Industrial Average is on track to have its best month since 1976, and the added recognition that the Dow Jones Transportation Average, Russell 2000, and S&P Midcap 400 are on pace to record double-digit percentage gains in October.

Currently, the S&P 500 futures are down 24 points and are trading 0.6% below fair value, the Nasdaq 100 futures are down 94 points and are trading 0.8% below fair value, and the Dow Jones Industrial Average futures are down 183 points and are trading 0.6% below fair value.

The main gist of things is that this October has been a great month for stocks, catalyzed by a technical rebound from oversold conditions, short-covering activity, better-than-feared earnings, and speculation that the Fed might soon convey an inclination to take a less aggressive rate-hike approach.

We will know soon enough. The Federal Reserve has its Federal Open Market Committee (FOMC) this week. It is a two-day affair, starting tomorrow and concluding Wednesday with a policy announcement at 2:00 p.m. ET and a press conference conducted by Fed Chair Powell at 2:30 p.m. ET.

It is widely expected that the FOMC will announce another 75-basis points increase in the target range for the fed funds rate. The hope, though, is that the directive and/or Fed Chair Powell will signal a strong likelihood of stepping down to no more than a 50-basis point rate hike at the December meeting.

The biggest short-term risk for the market, then, is that the Fed foregoes such a signal, leaving an impression that another 75-basis points rate increase is just as likely in December.

On a related note, a weekend article in The Wall Street Journal by Nick Timiraos highlighted the risk of the Fed’s terminal rate being higher than expected and staying there for longer due to excess savings and the resilience in consumer spending.

It was a previous article by Mr. Timiraos that got the market’s mind racing about the possibility of the Fed taking things down a notch in December, so the talk of a potentially higher terminal rate has helped cool things down a bit this morning after the stock market’s hot streak this month sizzled a little more on Friday following the PCE price data and Apple’s (AAPL) big move.

Other cooling points include sub-50 (i.e. contractionary) manufacturing and non-manufacturing PMI readings for October out of China that were weaker than the prior month, reports of increased COVID curbs in China affecting Foxconn’s iPhone production facility, a record-high 10.7% year-over-year increase in eurozone CPI in October, and Russia withdrawing from a UN-established grain shipping deal in the Black Sea.

There hasn’t been any major earnings announcements this morning, but it will be another busy week of earnings reporting. Another one-third of the S&P 500 will report quarterly results by the close on Friday. It will also be an important week for economic reporting as the September JOLTS report, the October ISM Manufacturing and Non-Manufacturing PMI reports, and the October Employment Situation Report are all on the docket.

There won’t be a shortage of trading catalysts, then, to begin the month of November. A red-hot October, however, has one more session to go and it is poised to begin in a cool-down phase.

Originally Posted October 31, 2022 – Red-hot October in a cool-down phase

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