We are surprised that the financial markets were surprised by the hawkish tone of remarks from Fed officials this past week. Collectively, a few participants on the Federal Open Mouth Committee pushed back against market expectations for an imminent rate cut, stressing that inflation is not yet under control and that monetary policy must remain restrictive.
In prepared comments during his October 29 presser, Fed Chair Jerome Powell stated, "A further reduction in the policy rate at the December meeting is not a foregone conclusion—far from it. Policy is not on a preset course." He was clearly pushing back against the widespread view (which we didn't share) that another rate cut would occur before the end of this year. On Friday, the odds of that happening dropped to less than 50% (i.e., 44.4%), according to the CME FedWatch Tool.
The S&P 500 fell sharply on Thursday, led by AI-related and Financials sector stocks, but didn't breach its 50-day moving average (chart). In addition to second thoughts about Fed easing, investors are having second thoughts about the AI trade, as we've noted in recent QTs.
We had been expecting a pullback. On November 1, we observed that "[w]hile earnings are bullish, sentiment is bearish in the very short term. There are too many bulls." Now, we expect to see a significant drop in the bull-bear ratios when this past week's data are released this week (chart).
