Will there be a dovish pivot?
After several weeks of declines, equity markets recovered some ground in October. This happened despite the Federal Reserve confirming tighter monetary policy was needed and economic data coming in mixed. On the other hand, company earnings were good with most companies reporting better than expected earnings.
This positive market trend is continuing this month even though the Fed just hiked another 0.75%. The reason being that investors are hoping the Federal Reserve will slow down the pace of interest rate increases next month and signal further slowdowns and even possibly a pause next year.
The US central bank is still facing the challenge of taming inflation without sending the economy into a recession. However, they have said that if they had to choose between the two, they would rather have a recession than out of control inflation. Nevertheless, after almost a year of hawkishness some members of the Federal Reserves are voicing the idea of seeing how these steep interest rate hikes are affecting inflation in the coming months and are still hoping to achieve a soft landing.
Next month’s interest rate decision and future guidance on the path of interest rates will be crucial to determine investors’ taste for risk assets going forward. A Federal Reserve dovish pivot would likely bring about further positive momentum whereas the opposite would likely trigger another leg down in equities.