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Fed Day has finally arrived. Investors and economists alike have set a reminder for 2 p.m. ET, when the central bank will detail its latest rate decision, and another alarm for 2:30 p.m., as Fed Chair Jerome Powell takes the podium. They'll be watching updated interest rate and economic projections, which will largely define trading behavior and sentiment as the market heads into 2023. "The time for moderating the pace of rate increases may come as soon as the December meeting," Powell said in his last media appearance, and it looks like that is now a reality.
Wall Street Breakfast Survey: Out of the 100 responses received following yesterday's softer CPI print (see below), 95% are now predicting a 50 basis point rate hike, and only 5% believe the Fed will still go for 75 bps. It's a notable change from a day earlier. Prior to the latest inflation figure, 2/3 of the 2,100 survey participants felt that the central bank was set to announce a half-point increase, compared to 1/3 that saw the Fed going through with a fifth consecutive 75 bps hike.
All in all, the Fed has cranked up its key rate by 3.75 percentage points in less than a year, from the near-zero level that had stayed in place over 2020 and 2021. The key rate, formally known as the federal funds rate, is closely watched because it influences interest rates throughout the economy. For consumers, rising interest rates make it more expensive to take out a mortgage, carry a balance on credit cards, or get a loan to buy a car. For businesses, it increases the cost of bank loans and for raising capital in the debt markets.
Outlook: Following a 50 bps hike today, Hank Smith, head of investment strategy at Haverford Trust, sees a 25 bps rate increase in February and possibly another quarter-point hike in March. Then "we're going to have a pause and allow for the lag effects of this monetary tightening to play through," he said in an interview with Seeking Alpha. The Fed will also be careful not to call it a pivot and "whatever the terminal rate is - whether it's five, five and a quarter percent - it's going to stay there for a period of time, most likely through 2023." As for how the Fed's policy will affect investing, Smith expects continued volatility in equity and fixed income markets given his outlook for a mild and brief recession in the middle of next year. (64 comments)
Consumers breathed a sigh of relief on Tuesday as inflation showed further signs of subsiding in November. The three major U.S. equity indexes jumped following the release, before paring much of the big gains during the session, while the 10-year Treasury yield was pushed back down to a level of 3.50%. "Make no mistake, prices are still too high," President Biden said in a statement. "But things are getting better, headed in the right direction."
Snapshot: The Consumer Price Index rose 7.1% Y/Y (vs. +7.3% expected and +7.7% prior) to mark the fifth straight decrease since June. It's also the smallest annual increase in the inflation rate in more than a year, indicating that the Fed's aggressive rate-hiking moves are filtering through the economy to reduce demand. Meanwhile, core CPI climbed 6.0% (vs. +6.1% expected and +6.3% prior), as shelter, the largest contributor to the CPI, more than offset decreases in the energy index.
"As I had been expecting, we are finally seeing a more precipitous decline in both headline and core rates of inflation, as both the monthly and annual rates are reported below expectations," SA contributor Lawrence Fuller declared. "The declines in transportation services and medical care are encouraging, while shelter costs should follow early next year."
More commentary: "The report suggests we're on the road to a soft landing," added David Russell, VP of Market Intelligence for TradeStation Group. "The Fed will keep talking tough and probably inch up the dot plot, but we seem to have turned a corner on inflation. Santa could be coming to town this year." (369 comments)
Moderna (MRNA) was one of the most active stocks during the session on Tuesday, staging a massive rally in response to promising developments. Shares soared nearly 20% as its experimental melanoma vaccine combined with Merck (MRK) cancer treatment Keytruda cut the risk of skin cancer recurrence or death by 44%. That compared with a treatment of only Keytruda that took place in a phase 2b study called KEYNOTE-942, while preparations to launch a first phase 3 trial are already on the way.
Bigger picture: Moderna, which rose to fame and fortune on the back of its mRNA COVID-19 vaccine, has now shown that the mRNA technology is not a mere one-trick pony battling the coronavirus, but could be a disruptor in the cancer space as well. The news could continue to provide a much-needed boost for the biotech, which is still down around 16% YTD. Besides the latest vaccine known as mRNA-4157, where a phase 1 trial in multiple cohorts is ongoing as per a Nov. 3 filing - Moderna is developing three other programs within its cancer vaccines modality.
"We believe that this should work in many tumor types, not only melanoma," CEO Stéphane Bancel declared, going as far to call the advances "Immunotherapy 2.0."
Go deeper: Moderna and Merck are not the only ones in the race for cancer vaccines. Agenus (AGEN), Anixa Biosciences (ANIX), CureVac (CVAC), GeoVax Labs (GOVX), ImmunityBio (IBRX) and VBI Vaccines (VBIV) are all getting in the race with various technologies. Even Merck is not just exploring the mRNA space, as it works on a new investigational class of engineered circular RNA (oRNA) that include vaccines and therapeutics for infectious disease and oncology. (37 comments)
Ukraine may soon get some air defense as the U.S. finalizes plans to supply the nation with its sophisticated Patriot system. It follows months of Russian missile and drone attacks on Ukraine's power and civilian infrastructure, and many urgent requests from President Volodymyr Zelenskyy. U.S. Defense Secretary Lloyd Austin could sign the directive as soon as this week, with President Biden approving the final request.
Thought bubble: Over the past year, the U.S. has held back on supplying its most advanced weaponry to Kyiv amid concerns that the war could escalate into a wider conflict with Russia. Items like General Atomics' MQ-1C Gray Eagle and Lockheed Martin's (NYSE:LMT) ATACMS have been off the table, which would allow for deep attacks into Russian territory. The Patriot is more defensive in nature, however, and the Biden administration appears to have softened its stance on providing the system.
Once the ink is on the dotted line, the Patriots are expected to ship within days and the Ukrainians will be trained to use them at a U.S. Army base in Germany. Millions of civilians in Ukraine are currently living with cuts to water, electricity and heating, as temperatures plummet in the thick of winter. Due to its long-range and high-altitude capability, Kyiv hopes the Patriot can potentially shoot down Russian missiles and drones miles away from their intended targets inside of the country.
Some history: The Patriot is produced by Raytheon Technologies (NYSE:RTX), with Lockheed Martin manufacturing the missiles it fires. The system has been around for many decades, but gained prestige prior to the 1991 Gulf War, when it was overhauled to provide capabilities against tactical ballistic missiles (in addition to enemy aircraft). In total, more than 240 Patriot fire units have been delivered to 17 U.S. allied nations, which have invested significantly in improvements, enhancements and upgrades. (2 comments)
In Asia, Japan +0.8%. Hong Kong +0.4%. China flat. India +0.2%.
In Europe, at midday, London -0.3%. Paris -0.3%. Frankfurt -0.5%.
Futures at 6:30, Dow +0.1%. S&P +0.1%. Nasdaq flat. Crude +1.1% to $76.18. Gold -0.4% to $1817.50. Bitcoin +2.3% to $17,845.
Ten-year Treasury Yield unchanged at 3.50%
Today's Economic Calendar
7:00 MBA Mortgage Applications
8:30 Import/Export Prices
10:00 Atlanta Fed's Business Inflation Expectations
10:30 EIA Petroleum Inventories
2:00 PM FOMC Announcement
2:30 PM Jerome Powell Speech
Companies reporting earnings today »
What else is happening...
Bahamas judge denies bail for FTX founder Sam Bankman-Fried.
Apple (AAPL) may allow alt app stores on iPhones to meet EU rules.
Lawmakers are pushing bipartisan legislation to ban TikTok.
United Airlines (UAL) loses altitude on blockbuster aircraft deal.
U.K. inflation eases slightly in November on sliding fuel prices.
Ford (F) increases production capacity for electric F-150 truck.
Tesla (TSLA) touches 52-week low as investors decry Twitter distraction