US stocks declined from record highs after Fed Chair Powell signaled they are on track to taper but refrained from giving any signs about interest rate hikes. Powell did not deliver a clear message at first, as audio issues made it difficult to hear him say that substantial progress in the labor market recovery was made and that they are ready to taper. The US economy still needs to fill 5 million jobs before the labor market recovery is back to 2020 levels, which should suggest immediate rate hikes after tapering is done might be a bit too aggressive.
The Fed Chair noted that the uneven recovery will eventually see job growth to return to the high levels seen in the summer. Bottleneck and supply chain issues will continue to keep pressuring prices in the short-term, and that them will probably last a lot longer than the Fed wants. Powell is still holding onto the belief that inflation will eventual abate late next year. If inflation does end up being persistent the Fed will use their tools.
The key takeaway from Powell was that the Fed is on track to begin tapering and that should be done by mid-2022, transitory inflation might last a little longer than expected, and that rate hike expectations should be written in pencil.
A busy Friday
Wall Street settled lower as Fed Chair Powell prepared markets for a November taper announcement and that rate hikes will happen if they are wrong about inflation being transitory. Some traders used Powell’s comments to lock in profits, but overall still remain optimistic following today’s mixed earnings, relieft that Evergrande made a crucial payment, and as US service sector activity bounces back.
Supply chain issues were the primary catalyst for poor earnings and cautious outlooks from Intel, Snap, Beyond Meat, and Chipotle US stocks refuse to break. There were some strong results from American Express, Regions Financial, and energy stocks continue to benefit from rising crude prices.
Social media platforms and companies dependent on advertising revenue are declining as supply chain issues have some companies pulling back ad spending. Snap stated that global supply chain issues and labor shortages are impacting their partners and that probably will remain the case throughout the holidays, which could really take away from what should be their strongest quarter.
The flash PMIs in the US provided optimism that the economy is still on sound footing. This month, the service sector rebounded. Despite the slowdown in economic activity that is being seen across the globe, both the US manufacturing and service sectors have activity in the high-50s. IHS Markit noted that the economy accelerates despite bottlenecks as services revive from the Delta wave, but prices rise at record pace. Everything from the flash PMIs matches up with everything we are hearing this earnings season, which should have investors getting more nervous that inflation may end up being persistent.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.