The Fed Is Nowhere Near Done with Rate Hikes

Last week, the market told us exactly why we should stay short as the jobs report and personal-consumption-expenditures (PCE) index both showed growth. This morning we saw a continuation of this trend as the Services ISM surprised analysts to the upside, delivering a 56.5 reading versus an expected 53.5.

The ISM is a gauge of U.S. business conditions at companies such as restaurants and banks, and a rising value signals the economy is still expanding. Any number over 50% shows the economy is expanding, but a reading over 55%, like we got this morning, is above historical averages.

Strength of ISM employment was also up from 49.1 to 51.5 month over month, following last week's employment numbers from ADP.

While there was a slowdown in new orders (56 vs 56.5) and backlogs of orders from the previous month, the decline was negligible.

The Services ISM is the first economic snapshot for December, and it could be a preview of what is to come, especially if Fed Chairman Powell is considering raising the Fed funds rate more than 50 basis points. This could have a big impact on the market given the high probability of a 50bps hike and a 75% chance for a target range of 425 to 450 basis points for the December FOMC meeting, according to CME Group.

It's all a bit of a reminder that, when it comes to raising rates, the Fed's work isn't done yet, especially as the services sector is where marginal inflation pressures could rear its head. If inflationary pressures do come back, the Fed will have no problem raising rates further than expected given the back-to-back 75 bps hikes we have already seen.

Given the current economic uncertainty, this would naturally lead to an increase in hawkish Fed bets, and a break back below the S&P 500's 200-day moving average (MA200) could set off a wave of short selling.

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