Fed Reserve head Jerome Powell pivots but China and Russia still key for Australia

Sharemarket investors have welcomed a rate hike pivot by the US central bank but what happens in China and Russia-Ukraine are the real keys to how Australia exits 2023.

So, it is now blindingly obvious that we are going to get that Fed ‘pivot’ which Wall St had expected – hoped and lusted for – to have been delivered at the start of November.

Indeed, we all-but got it overnight Wednesday downunder time – directly out of the mouth of Fed head Jerome Powell, when he all-but announced the Fed would not have another 75-point rate hike at its last meeting for the year mid-month.

Will it be 50?

Or will Powell go the ‘full Santa’ and do only 25?

The answer might well lie in the latest US inflation figures which surface just as the Fed goes into its two-day meet.

If they again ‘surprise’ on the ‘low side’, the chances of Powell ‘doing a Lowe’ – that’s to say, copying our own Reserve Bank’s switch to 25 pointers (two already, with a third next Tuesday) – increase dramatically.

As I wrote a couple of weeks back, when the last US monthly inflation figures surfaced, it was “entirely possible, maybe even probable, that a serious and sustainable slowdown in US inflation has been ‘hiding in plain sight’.”

I went on to suggest that “if indeed, US inflation is heading significantly and sustainably lower, this will have huge – and entirely positive – consequences for both economic policies and economic (and financial) conditions right around the world, including here in Australia”.

Well, the share market – both here and on Wall St – has certainly ‘gone long’ on that ‘low inflation-rate pivot’ expectation, despite what was surprisingly tough talking into the inflation good news from Powell.

Federal Reserve Board Chairman Jerome Powell. (Picture: Mandel NGAN / AFP)

Far from eagerly seizing on the good inflation news – which was not just in October, but had really been building since July – Powell had doubled down on talking tough, both at the last Fed meeting at the start of November and through mid-November.

I did muse back then, that maybe Powell was trying to psych Wall St: talk over-tough, to cement a low-inflation mindset, to more easily go really dovish in December.

Whatever, he has now, well, pivoted; he will now go dovish in December.

Two big questions for investors flow from this.

First, has Wall St ‘over-anticipated’ what’s coming.

The Dow is now up 20 per cent since its end-September low-point.

Indeed, it’s just 5 per cent shy of its late-2021 record high.

Remember, that high came when the Fed’s official rate was zero; it’s now 3.75 per cent and will still go to at least 4 per cent in two weeks.

So will it be a case of buying on the expectation and selling on the delivery?

But if so, critically, would any such period of Wall St going sideways or even down, really be more a pause that refreshes?

That feeds into the bigger, wider, more fundamental, questions around the developing state of the US and global economies.

We are getting this Fed pivot because inflation is probably falling significantly and sustainably.

That’s a product of two things.

First is the clear easing if not full resolution of all the ‘supply-side issues’, flowing from both the Covid disruptions and Russia’s attack on Ukraine.

Some of that, obviously, now turns very critically on how Europe especially gets through the coming winter without Russian oil and gas.

Further, secondly, slowing global inflation also reflects a serious slowdown in the global economy.

That might be pointing to a ‘Goldilocks 2023’ – for investors at least.

Some combination of expectations of actual rate cuts, not just an easing in the pace of rises, combined with the global economy (and corporate profits) picking up pace.

Wall St is not only greedy, it’s intensely parochial.

So this is ‘all about America’.

In fact, what happens in China and Russia-Ukraine are the real keys to how we exit 2023.