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Market Rally Won't Discourage Fed from Cranking Rates

·3 min read

Markets picked up in Monday’s session where they left off Friday: higher. In what looks a bit like taking a lead off first base with expectations that tomorrow’s Consumer Price Index (CPI) print for August will continue to head lower, the Dow gained +227 points, +0.71% with 27 of its 30 stocks closing in the green; the S&P 500 saw all 11 sectors finish in positive territory, +1.06%; while the Nasdaq led all major indices, +154 points or +1.27%. The small-cap Russell 2000 wasn’t far off: +1.23% on the day.

And while mini-rallies like these do help us feel better about our equities portfolios in what has been a very challenging year, they do not discourage the Fed from keeping the heat on interest rate levels. What the 2.25-2.50% Fed funds rate over the past six months has managed to do thus far is bring things like mortgage rates higher, thereby cooling the housing market. But the Fed wants to see shrinkage in all aspects of the economy in order to feel better about curbing inflation, and that goes for the stock market as well.

Thus, while we may see a lower-than-expected year-over-year CPI rate tomorrow (+8.5% was July; +8.0% is expected for August), even something with a 7-handle on it, it’s unlikely to force the Fed to pivot on its interest rate increase next week. Currently, the consensus is for a 75 basis-point hike, which would bring the bottom end of the range to an even 3.00%. This will continue to cool the economy; even +7% headline CPI year over year is way higher than the Fed’s optimum level of +2% inflation.

On the other hand, one thing putting markets in a good mood regarding all this is that the labor market has remained relatively robust, even as the Fed has tightened the thumbscrews on the economy. The longer we can see this stay the case, especially as inflation metrics continue to recede, the greater the likelihood we skirt a Fed-led recession. At the same time, it allows the Fed to remain emboldened to keep pressure on interest rates — also draining the massive Fed balance sheet, which is scheduled to accelerate this month to $60 billion in Treasury expiries per month, $35 billion on the mortgage-asset side.

Enterprise database and software giant Oracle ORCL released fiscal Q1 earnings after today’s closing bell, missing slightly from Zacks consensus estimates on both top and bottom lines: earnings of $1.03 per share was 4 cents short of expectations (although the company cited an 8-cent per share hit from foreign exchange issues in the quarter), while $11.45 billion in sales narrowly missed the $11.47 billion analysts were looking for.

Officially, this is the second earnings miss for Oracle in the past three quarters — and the company had not disappointed on bottom-line expectations for six full years prior to this. Late-market trading has been volatile on the news, though is curiously flat at this hour. Oracle shares are still down -12% year to date, but this still makes it an outperformer compared to the Tech sector in general. The company brought a Zakcs Rank #2 (Buy) into its earnings report today.

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