S&P 500 Seesaws After Hawkish Fed Minutes, Stock Market Fate Tied To Inflation Data

By Diego Colman of DailyFX

Wednesday, October 12, 2022 3:00 PM EST

The Federal Reserve this afternoon released the minutes of its September meeting, at which the bank implemented the third consecutive three-quarters point interest rate increase and pledged to return monetary policy to a "sufficiently restrictive" stance to restore price stability.

Several Fed officials have spoken in recent days to share their views on the tightening roadmap and inflation risks, so the summarized record of the last FOMC conclave didn't contain many surprises or provide new details that Wall Street didn't already know.

In any case, the minutes reinforced the prevailing message that policymakers will remain committed to an aggressive hiking path and will not change course until they see clear and convincing evidence that the underlying drivers of above-target CPI readings are beginning to materially fade. This means that the bar is very high for a “policy pivot” at this time.

Here are some of the highlights from the Fed minutes:

Fed officials favor reaching a restrictive posture in the near term amid “unacceptably high inflation”
Several members see the cost of taking too little action as higher than delivering a stronger response
Participants believe it would be appropriate to slow the pace of tightening at some point
Several policymakers saw the need to calibrate the tightening cycle to mitigate unwanted risks

The document’s hawkish tone suggests that the bank is prioritizing its fight against inflation over economic growth and, therefore, may be prepared to deliver another supersized 75 basis point hike at its November gathering if conditions warrant further front-loaded action.

Investors and traders will have a clearer picture of what to expect in terms of monetary policy tomorrow after the U.S. Bureau of Labor Statistics releases the September consumer price index report. Annual headline inflation is forecast to moderate to 8.1% from 8.3%, but the core gauge is seen accelerating to 6.5% from 6.3% previously, matching the cycle’s high set in March.

For sentiment to recover and stocks to mount a meaningful recovery, the data has to surprise on the downside in a way that reduces pressure on the Fed to step up the pace of rate rises. In-line or above-estimate numbers could unleash a sell-off on Wall Street, as happened last month when hotter-than-anticipated August CPI results sent the S&P 500 tumbling about 4.2%.

MARKET REACTION TO FED MINUTES

Immediately after the Fed minutes crossed the wires, the S&P 500 pushed higher into positive territory, as the summarized record of the last FOMC meeting failed to deliver any new bombshells. With several central bank speeches in recent days, the minutes didn’t bring any new information to the table. Despite the somewhat favorable equity market reaction, the outlook remains gloomy for both the S&P 500 and the Nasdaq 100 on account of rapidly slowing economic activity, rising borrowing costs, and heightened financial risks, but we should get a better sense of the near-term trend tomorrow after analyzing the September CPI figures.