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European stock markets trade a bit firmer in early trade on Wednesday ahead of the key Federal Reserve meeting later. US markets tried to mount a rally but fizzled on stronger-than-expected jobs data yesterday. Asian markets built on gains from the prior session as market chatter still suggests China is looking for a way to end its zero covid policy...seems wishful and just an ‘anything-goes’ type rally from oversold levels, pre-Fed moves. Trading on the Hang Seng was halted for a typhoon. Shipping company Maersk warns of ‘dark clouds on the horizon’. The yen trades firmer after Bank of Japan governor Kuroda said could shift policy if 2% inflation target is achieved, but says no need to change yield curve control yet. 

Pivot?

Job openings in the US surprised to the upside, knocking sentiment for stocks yesterday afternoon and nudging Wall Street lower for the day as it pointed to no imminent pivot from the Federal Reserve. Jolts job openings increased to 10.7 million, against expectations for a fall to 10 million. The data suggested the pivot narrative might be premature – remember those comments from BlackRock (expect pivot language at this meeting). But...the market continues to hope for some kind of careful language about reducing the pace of hikes. In his remarks at the last two press conferences Powell has said that “at some point, as the stance of monetary policy tightens further, it will become necessary to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation”. Any change to this – perhaps suggesting that this point might be arriving – may be seen as a pivot. If Powell suggests that this point has arrived, and that the FOMC expects to begin slowing the pace of hikes at the next meeting, it would be considered very dovish and spark a major move higher for equities with a move lower for USD and US rates. However, the market is already expecting a slowdown in the pace of hikes in the coming meetings and the Fed will want to remain data-dependent – slowing is not the same as a pivot (starting to cut) but the market might like it anyway.

Go above inflation?

The fact is the Fed probably needs to go higher than is currently predicted. Go back to basic principles – once inflation goes above 5% it only comes down by bringing rates above the CPI. This is a new inflationary dynamic which is self-sustaining...that does not mean the Fed doesn’t start to get a bit of buyer’s remorse and think that it could do with slowing as it waits for the cumulative impact of four jumbo hikes to catch up. However, my gut tells me that as the labour market remains strong and core inflation is still rising, they need to keep it hawkish. Hawkish could be leaving another 75bps on the table for December – there are midterms and plenty more inflation and jobs reports before the last meeting of the year, so a data-dependent Fed can hardly call time on 75bps entirely. Powell could lean heavily on remaining data-dependent and stress the need to go higher than the market expects at the next meeting if there is no sign of inflation easing off. If Powell doesn’t give anything away on slowing hikes there might be a sizeable and painful move higher for USD and rates, with a corresponding leg lower for stocks.

Earnings watch

Shares in Uber jumped more than 11% yesterday as it reported passenger numbers had exceeded pre-pandemic levels as third quarter revenues beat expectations. Management were bullish on the demand for delivery and ride-hailing services but warned that the strong dollar would hit gross bookings by $1.8bn in the fourth quarter.

AMD missed forecasts but data centre sales held up and the company expects to get rid of excess inventory by the end of the year. Shares rose 4% in after-hours trade.

Airbnb profits beat forecast but growth in bookings slowed to 29% from almost 60% in the second quarter. The company also said fourth quarter earnings could miss forecasts and bookings would moderate further as it starts to feel the impact of the strong dollar. Shares fell by around 6% in after-hours trade after rising 2% in the normal session ahead of the report. Elsewhere, Amazon market cap fell below $1tn. Meta rose a touch. Earnings today come from  Estee Lauder, Etsy, Liberty Global, Qualcomm and Roku. 

 Car crash

Aston Martin shares declined 11% as it cuts its outlook for sales and profits this year and signalled ongoing supply chain disruption. Retail is ok, but wholesale volumes decreased by 4% year-on-year due to supply chain problems. That saw it revise its full year forecast for wholesales to be in the range of 6,200 to 6,600, down from 6,600 previously. Margins are now seen growing at 100-300bps, down from the previous range of 350-450bps. Although revenues rose, pre-tax losses jumped to more than £225m. Interest costs on debt are £135m higher than thought due to the weaker pound. Working capital outflow of £106m in the quarter due to supply chain disruptions, which includes over 400 part-finished vehicles still waiting final parts.

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