A version of this story first appeared in CNN Business’s Before the Bell newsletter. Not a subscriber? You can login exactly here. You can listen to an audio version of the newsletter by clicking the same link.
Fed Decision Day is here, and with it comes some potentially bad news for the market.
Because investors are hoping again that the central bank will announce an easing of interest rate hikes in the fight against rising prices. The problem is that the enthusiasm could turn faster than you can say “inflation”.
What’s happening: The Dow ended October up 14%, its best monthly gain since January 1976. The Nasdaq was up about 4% last month, while the S&P 500 was up 8%. Part of that was thanks to solid corporate earnings, with companies from GM to Coca-Cola reporting strong third-quarter earnings and sales.
In addition, comments from Fed officials and news reports led markets to accept the idea that while the central bank is likely to raise interest rates by three-quarters of a percentage point at its Wednesday meeting, December’s hike could be smaller.
Markets were betting on an 84% chance Tuesday night that the Federal Reserve will hike interest rates by three-quarters of a percentage point on Wednesday, according to the CME Fedwatch tool, according to the CME Fedwatch tool.
However, expectations for the December meeting were more divided. The market put the odds of a three-quarter point hike at 50%. The probability for a The smaller half-point increase was 43%, but that was it from 29% just two weeks ago, signaling growing optimism among investors.
We have been here before: This isn’t the first time investors have rushed into the markets believing they would a Fed pivot. That didn’t go so well. The last time the market ran with a central narrative was in the summer, Fed Chair Jerome Powell responded with a very aggressive speech in Jackson Hole that sent markets tumbling. The Fed continued to raise interest rates in the months that followed.
Investors are seemingly addicted to the ups and downs of any perceived shift in Fed thinking, making markets overly volatile.
What investors are watching: A possible easing of rate hikes is likely to be discussed at this month’s meeting, but the eventual peak in the fed funds rate will depend on economic data yet to be released.
As the script narrative picks up again on Wall Street, it will take a carefully orchestrated press conference and statement from the Fed to revise expectations while saving markets from another collapse.
This week’s statement will not include updated economic forecasts, so investors will be watching Powell’s post-meeting press conference closely for clues that could shape financial markets in the coming weeks.
“The risk for the Fed heading into the upcoming meeting is communicating its true intentions, knowing that markets could take any sign of a pullback from the pre-load as a sign of an intentional pause in ongoing rate hikes,” it wrote Steven Ricchiuto, US chief economist at Mizuho Securities USA, in a note.
Now that markets have recovered, “we think the chairman will emphasize the risks of pausing too early versus the risks of over-tightening as the main rationale for policy,” Ricchiuto said. “If we’re right, there must be a sharp correction in the markets.”
BP’s earnings more than doubled in the third quarter of the year, leading to a record earnings streak for the world’s largest oil and gas companies, reports my colleague Hanna Ziady.
The UK-based energy company posted a profit of $8.15 billion for the July-September period, compared to $3.3 billion a year ago. Gains were fueled by “extraordinary” results in gas trading, BP said in a statement on Tuesday.
The result means that Big Oil — BP (BP), Shell, ExxonMobil, and Chevron (CVX) — posted more than $58 billion in profit in the third quarter alone. The record earnings come as more households in Europe and North America suffer from decades of inflation fueled by rising energy and food bills.
Shareholders, meanwhile, benefit generously. BP said it would use excess cash to buy back $2.5 billion worth of stock, bringing total share buybacks to $8.5 billion this year. Shell spent $18.5 billion on share buybacks this year and paid hefty dividends to boot.
The unprecedented earnings are prompting renewed calls in the UK and US for unexpected taxes on energy companies to help households struggling to pay mounting bills.
There was little demand for private companies to make their debut with IPOs this year, my colleague Paul R. La Monica reports.
Only two companies went public in the past month. According to data from IPO research firm Renaissance Capital, this was the slowest October for the US IPO market since 2011. Additionally, just 66 companies have gone public so far this year, down more than 80% from a year ago.
Several high-profile unicorns — the nickname given to startups valued at $1 billion or more based on their most recent funding round — have reportedly scrapped plans to go public this year. Many are hoping to do so in 2023 instead, when the broader market improves.
That list reportedly includes grocery shopping service Instacart, social media site Reddit, and fintech giant Stripe.
Nevertheless, there is hope that the market for traditional IPOs is slowly turning.
One of the two companies to go public in October was Mobileye, a self-driving car company that had been owned by chip giant Intel (INTC). Demand for Mobileye shares has been strong. Shares were above their supply range, up nearly 40% in the first day of trading.