On Wednesday, Nov. 30, the market spiked higher in response to a speech by Fed Chairman Jerome Powell. Powell essentially confirmed that the Fed was likely to hike rates by one-half percentage point at its next meeting in December and commented how the Fed likely would slow hikes but would drag them out for a longer period and eventually take them higher than previously thought.
This wasn't anything new or surprising in Powell's comments, but the market wanted an excuse to spike higher, and so it did. Over the next week, the gain was completely reversed and then some, and we are back at around the same level as before the Powell speech.
That is the setup as we await the latest Producer Price Index (PPI) and Michigan consumer sentiment figures here on Friday morning, and then Consumer Price Index (CPI) data and Federal Open Market Committee (FOMC) interest rate decision next week.
Expectations are that inflation is continuing to cool, and the bulls hope that soft numbers will bring more upside.
The problem is that the market narrative has been shifting. It is now widely accepted that inflation has peaked and that the Fed will hike by 50 basis points next week. That already is baked into the market to a great extent. What is not baked in are growing concerns about strength in employment and the potential for a recession next year.
One interesting piece of data that illustrated the concerns about wage inflation is that the Atlanta Fed reported Thursday that wages for people who switch jobs are jumping substantially more than wages for people who stay in the same job. This illustrates how strong demand still is for labor and suggests the Fed still needs to be extremely hawkish to kill this form of inflation.
We are likely to hear more about the labor market next week when the Fed makes its interest rate decision, and that will determine the market response more than anything else.
This morning we will see PPI. This report is no longer as important because the market believes it has peaked, but if it is hot, it will be a nasty surprise. If it is soft, there is likely to be a positive response, but it may not be sustained because there are other issues that matter more.
Technically, conditions favor a positive response to the news, but this market has been choppy and sloppy lately as it looks ahead to the Fed.
My game plan is to look for index trades and maybe day trades. I still so no reason to build longer-term and position trades. Maybe after the Fed we can catch some trend into the end of the year.