The ASX 200 rally faces its next test: The Fed

The ASX 200 rallied an outsized 1.65% to a six week high on Tuesday, fuelled by another dovish 25 basis point hike from the Reserve Bank.

The three day winning streak has helped the ASX 200 break its recent 6,820 to 6,635 point trading range and push above the 200-day moving average for the first time since 26 August.

Still, the market faces one of its biggest hurdles yet. The Fed's interest rate decision at 5:00 am AEDT.

Fed commentary: Hawkish or dovish

The Fed is widely expected to hike rates by a fourth consecutive 75 bps which will bump the target rate to 3.0% to 3.25%.

Though, the Fed's commentary after the rate hike is what's arguably more important.

The market has rallied on hopes that the November meeting will mark the last jumbo-sized 75 bp hike, with expectations of a 50 bp increase in December and 25 bps next February.

Still, the argument slowing down versus staying hawkish remains rather balanced. Some perspectives for both below.

Hawkish hike:

• A strong labour market: US job openings in September were unexpectedly strong, jumping to 10.7m from 10.3m in the prior month. The Fed wanted to see the ratio of vacancies to unemployed workers decline, but it instead ticked up from 1.68 to 1.86, according to the Wall Street Journal.

• Sticky inflation: US core inflation accelerated to 6.6% in September from 6.3% in August to the highest level since 1982. Several indexes including shelter, medical care, new vehicles, furniture and education increased over the month. The Fed has reiterated the dangers of not hiking enough, so why slow down when core inflation is still picking up?

Dovish hike:

• Weak GDP growth: US Q3 GDP rose 2.6% quarter-on-quarter, beating expectations of 2.4%. But there's more than meets the eye. Net exports added 2.77% to growth, thanks to the soaring dollar, according to RSM. This means that private domestic demand was rather weak.

• Manufacturing weakness: The US manufacturing industry accounts for approximately 12% of GDP. The latest October PMI reading came in at 50.4 as new orders fell at the sharpest rate since May 2020. “Confidence in the outlook waned as underlying data also highlighted efforts to cut costs and adjust to more subdued demand conditions in the coming months," noted S&P Global.

• Housing weakness: US pending home sales fell -35% year-on-year in October, with the fewest homes under contract in any October since 2015, according to Bloomberg. National house prices were still 13% higher in August compared to a year ago, but rapidly cooling down, according to the S&P CoreLogic Case-Shiller Home Price Index. In the previous month, house prices were up 15.6%, the 2.6% difference is the largest one in the history of the index, which dates back to 1987.

Rate hike days

The S&P 500 has mostly rallied on rate hike days this year, with an average gain of 1.69%.

• 16 March +2.2% (in-line)

• 4 May +3.0% (in-line)

• 15 June +1.5% (75 bps vs. 50 bps est)

• 27 July +2.6% (in-line)

• 21 September -0.83% (in-line)

Does this trend of positive rate hike performance continue? Or does an overly hawkish Powell rattle the market?