Zandi said the Fed clarified its position on raising rates in its post-meeting statement this past week, after surprising markets by not hiking in September and pointing instead to a slowing China as an issue. “It was not clear what they were trying to say. Their communication strategy broke down. I was confused by them. Maybe they were confused,” he said.
Stocks kick off November on Monday, after the best monthly gain in four years. The S&P 500 ended October at 2079, gaining 8.3 percent for the month but just 0.2 percent for the past week. That was its best month since 10.7 percent gain in October, 2011. Those strong gains, however, do not necessarily bode well for the market’s near-term performance, with some analysts predicting that October now has taken some of the gains away from a year-end rally.
The Fed again surprised markets in its post-meeting statement Wednesday by downplaying concerns about international developments, like China, and instead specifically mentioning what it will consider when making a decision about whether to hike rates at its Dec. 16 meeting. The market had been pricing in a one-in-three chance of a hike for December, but those odds have risen and that could affect the market.
“It’s 50 percent now. That is maximum uncertainty. From that point of view, we think upside in the near term is going to be capped by the fact there is this new uncertainty,” said Julian Emanuel, equity and derivatives strategist at UBS. “It’s not entirely clear the Fed is reacting to incoming Chinese data, having removed that from its statement, or just reacting to the fact that markets seem to be a little more sanguine since the September meeting, particularly with respect to China. The whole mantra about being data dependent and needing to have a degree of uncertainty about liftoff is understandable, but in our view it caps the upside over the next month or so. What’s likely is looking toward the end of the year, after what we think is a pause, you’re going to get more upside as uncertainty dissipates.”
Emanuel said he thinks stocks could trade sideways until the Fed’s decision is clear, and his target for the S&P at year end is 2,125, just about 50 points higher than Friday’s close.
“Part of the reason that October’s gains were as vigorous as they were was that the market was relieved the Fed was taken off the plate as an issue, and the Fed is now squarely back on the plate and frankly as large as turkey and stuffing,” he said.
While the Fed speakers in the coming week could shed some light on Fed thinking, markets are more likely to lean on the data when looking for clues as to how quickly the Fed is moving toward its first rate hike in nine years.
“They’re a loquacious bunch. They really want to get their views out there,” said Zandi. But he said the markets will tune out any contradictory messages, particularly if they don’t come from the core of the committee, made up of Fed Chair Janet Yellen, New York Fed President William Dudley and Vice Chairman Stanley Fischer.
Yellen testifies before the House Finance Committee Wednesday and is discussing bank regulation. Dudley and Fischer are at forums where they are more likely to make comments on policy, and they also speak Wednesday. There are also appearances by Fed. Governors Daniel Tarullo and Lael Brainard, who both publicly disagreed with Yellen recently, saying the Fed should not raise rates this year.
Jobs data is the most important report in the coming week, but there is also ISM manufacturing data Monday, vehicle sales Tuesday, international trade and nonmanufacturing ISM Wednesday. There are also dozens of earnings reports, including Facebook, Disney, News Corp, AIG and dozens of others.
“I certainly think the payroll numbers are critical because there’s a significant contingent in the markets that think the economy has softened … and the Fed pretty firmly disagreed with that idea in the way they termed their statement,” said Stephen Stanley, chief economist at Amherst Pierpont.
Stanley said the Fed’s revised statement reflects more confidence that it can raise rates, unless the economy really takes a turn.
“The Fed thinks there’s a pretty legitimate chance of going in December, and the market was in the process of pricing that out. I don’t think the 50/50 is the final resting place. I think the Fed wants the markets prepared for what they’re going to do. They’re going to signal that, and they’re going to want that increasingly priced in. Fifty-fifty is the right place to be now, but it’s not going to be the right place to be in the final days leading up to that meeting,” he said.
Stanley said the Fed speakers are likely to repeat what they’ve said previously and leave it to Yellen to send any more certain message on what the Fed is likely to do