Seventh time a charm? Here are the other six times the market wrongly thought there'd be a dovish pivot

By Steve Goldstein

Stocks have rallied, in particularly the out of favor small caps and more speculative names, after data showing consumer and then producer prices coming in below economist estimates, as the unemployment rate has climbed a half-point from its lowest level.

Henry Allen, a strategist at Deutsche Bank, cautions that it's the seventh time this cycle that markets have attempted to make a dovish pivot. The other six, obviously, have been wrong.

Here's his chronology:

Nov. 2021: The omicron variant appears. That leads traders to think the virus may again overwhelm health services, and ensuing economic pain, which in turn would mean that central banks would not have to hike rates.

Late Feb. 2022/early March 2022: Russia invades Ukraine. The immediate impact was that the Fed kicked off its rate-hike campaign with a 25 basis point rather than 50 basis point increase. In retrospect, the invasion exacerbated inflationary problems while not denting economic activity much at all.

May 2022: Investors began to get worried about multiple growth worries: China's zero-COVID strategy, the war in Ukraine, as well as the fact the Fed rate hike cycle had started.

July 2022: Fears of an imminent global recession as well as a decline in the CPI led to speculation of a dovish pivot, including from Fed Chair Jerome Powell, who said "it likely will become appropriate to slow the pace of increases." He pivoted back to the hawkish side at the Jackson Hole speech in late August.

Late September 2022/Early October 2022: The financial crisis in the U.K., sparked by a budget from former Prime Minister Liz Truss and exacerbated by a pension crisis there, leads markets to price in fewer rate cuts for 2023.

March 2023: The banking turmoil from the crisis of banks including SVB led markets to think the Fed may be done hiking rates.

Here it is in chart form, using the yield on the 2-year BX:TMUBMUSD02Y and 10-year BX:TMUBMUSD10Y Treasury.

"Clearly it's possible that this time could be different, and the rise in unemployment and the fall in inflation is putting us closer to a position where the Fed have begun to cut rates in previous cycles. But 2023 has shown how expectations for cuts have been repeatedly pushed into the future," says Allen.

-Steve Goldstein

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

11-16-23 0932ET

Copyright (c) 2023 Dow Jones & Company, Inc.