The Fed Minutes May Deliver A Massive Blow To The Stock Market

It will be a holiday-shortened trading week, but it will not be short on news events.

Traders this week will also be looking to minutes of the most recent Fed policy meeting for further clues on the central bank’s path ahead.


Summary

  • The November Fed Minutes will be released Wednesday afternoon.

  • The bond and currency markets are already preparing for very hawkish minutes.

  • Fed board members appear to think rates may head towards 5%.

US stocks dropped in the last few sessions as investors digested comments from Federal Reserve officials who broadly remained steadfast in their fight against inflation. Mounting concerns that China may tighten Covid curbs after a string of reported deaths also continued to weigh on investors.


Technology stocks, which are typically more sensitive to interest rates, dragged the S&P 500 lower. The Nasdaq 100 ended the day down 1.1% yesterday. Oil emerged from a volatile session largely unchanged after Saudi Arabia denied a report that it is discussing an oil-production increase for the OPEC+ meeting next month. The dollar climbed for a third day as investors sought haven assets. Treasuries were mixed.

US Dollar Index Chart (DXY)


Investors are closely watching what Fed speakers say about the outlook for interest rates. While several central bank officials in recent days have restated their intention to remain relentless until inflation is under control, they differ on how far they’ll go. On Monday, San Francisco Fed President Mary Daly said that officials will need to be mindful of the lags with which monetary policy is transmitted through the economy as they raise rates further. Her Cleveland counterpart Loretta Mester said she’s open to slowing the tempo of rate hikes.


“This shouldn’t be regarded as a pivot or anything new,” said Michael Contopoulos, director of fixed income at Richard Bernstein Advisors. “A real pivot is when the Fed starts to cut rates and/or pause quantitative tightening. That is nowhere in sight.”

Atlanta Fed President Raphael Bostic, meanwhile, has said he favors slowing the pace of interest rate increases, with no more than 1 percentage point more of hikes, to try to ensure the economy has a soft landing. Boston Fed President Susan Collins has reiterated her view that options are open for the size of the December interest-rate increase, including the possibility of a 75 basis-point move.

“For the Fed right now, if we do get some slowing in inflation -- which it seems like we might -- but you’re not seeing it in the slowing of service inflation, that’s related to a tight labor market,” Veronica Clark, economist at Citigroup, said on Bloomberg Television. “You do need to see that loosening in the labor market data.”


Meanwhile, China saw its first Covid-related death in almost six months on Saturday and another two were reported on Sunday. Worsening outbreaks across the nation are stoking concerns that authorities may again resort to harsh restrictions. Shutdowns could have a negative impact on supply-chain dynamics and possibly exacerbate inflation issues across economies.


Key events this week:


US Richmond Fed manufacturing index, Tuesday

OECD releases Economic Outlook, Tuesday

Fed’s Loretta Mester and James Bullard speak, Tuesday

S&P Global PMIs: US, Euro area, UK, Wednesday

US MBA mortgage applications, durable goods, initial jobless claims, University of Michigan sentiment, new home sales, Wednesday

Minutes of the Federal Reserve’s Nov. 1-2 meeting, Wednesday

ECB publishes account of its October policy meeting, Thursday

US stock and bond markets are closed for the Thanksgiving holiday, Thursday

US stock and bond markets close early, Friday