12/14/2023
The Federal Reserve held interest rates steady again in November. Favorable inflation reports sparked a rally in equity prices, and a sharp decline in U.S. Treasury yields investors stoked optimism that the Fed is done raising interest rates.
U.S. Economy
GDP growth for the third quarter was 4.90% on an annualized basis, compared to estimates of 4.50% growth. The reading came in higher than the second quarter GDP, which was revised down to 2.10%. The GDP report highlights the resilience of the U.S. consumer despite ongoing concerns of a slowdown. Many economists, however, see this as the high-water mark for economic growth before the credit tightening induced by the Federal Reserve’s interest rate hikes and the recent rise in bond yields restrains business development and consumer spending. EY’s chief economist foresees real GDP growing a muted 1.40% in 2024, following expected growth of 2.40% in 2023.
U.S. payrolls added 150,000 jobs in October versus the consensus forecast of a 170,000 increase, a sharp decline from the 297,000 increase in September. The unemployment rate rose to 3.90%, the highest level since January 2022. Average hourly earnings rose less than expected in October, up 0.20% for the month compared to an expected increase of 0.30%, while the 4.10% year-over-year gain was slightly higher than the 4.00% expected. The healthcare, government, and construction sectors were the largest contributors to the increase in new jobs, while manufacturing posted a decline, mostly due to the auto strikes. The report confirmed expectations for a slowdown and possibly took some pressure off the Federal Reserve to increase interest rates at its November meeting. Initial claims for unemployment rose 13,000 to 231,000 for the week ended November 11th, the highest since August. Economists had forecast 220,000 claims for the latest week.
The Producer Price Index (PPI) fell 0.50% in October, the largest decrease since April 2020. The PPI increased 0.40% in September. Economists had forecast the PPI would edge up 0.10% in October. In the 12 months through October, the PPI increased 1.30% after rising 2.20% in September. Goods prices dropped 1.40%, with a 15.3% plunge in gasoline prices accounting for more than 80.00% of the decline. Excluding the volatile energy price component, core prices edged up 0.10% in October.
U.S. consumer prices were unchanged in October amid lower gasoline prices, and underlying inflation showed signs of slowing, supporting views that the Federal Reserve was probably done raising interest rates. The unchanged reading in October followed a 0.40% rise in September. In the 12 months through October, the CPI rose 3.20% after increasing 3.70% in September. Economists had forecast the CPI gaining 0.10% on the month and increasing 3.30% on a year-over-year basis.
U.S. retail sales fell 0.10% in October. Economists had forecast retail sales would fall by 0.30%. Retail sales are mostly goods and are not adjusted for inflation. The decline was led by sales of motor vehicles and parts, which fell 1.10%. Economists attributed some of the decrease to the recently ended United Auto Workers strike, which may have limited the supply of vehicles available for sale. Furniture store sales and sales at miscellaneous retailers fell 2.00% and 1.70%, respectively.
Monetary Policy
The Federal Reserve held interest rates steady at its November meeting. After the meeting, Chairman Powell said the better course of action for now, given the uncertainties, was to maintain the Fed’s benchmark overnight interest rate in the current 5.25%-5.50% range and see how job and price data evolve between now and the next policy meeting in December.
In a subsequent speech, Powell said he and his colleagues remain steadfast in getting policy in line with their 2.00% inflation goal, but “we are not confident that we have achieved such a stance.” He stressed the Fed nevertheless can be cautious as the risks between doing too much and too little have come into closer balance.
Fiscal Policy
The House passed a bill to fund the government through early next year, averting a possible shutdown. The Senate will take up the bill next, where leaders on both sides have signaled support.
Moody’s changed the outlook on U.S. government securities to “negative” from “stable”. The ratings agency said that the United States’ fiscal deficits will remain very large, significantly weakening debt affordability. Moody’s affirmed the long-term issuer and senior unsecured ratings at “Aaa”.
Markets
U.S. stocks pulled back after a roaring rally as investors started to question the idea the Federal Reserve is poised to pivot away from interest rate hikes.
U.S. Treasury yields tumbled after the favorable CPI report stoked investor optimism that the Fed is done raising interest rates. The yield on the benchmark 10-year Treasury note was around 4.47%.
Oil prices fell on big U.S. crude stocks build and record production, along with mounting worries about demand in Asia. WTI crude traded around $73 per barrel.
Gold prices rose on a spike in unemployment claims as traders bet that the Fed is done raising rates. Gold futures traded around $1,983 per ounce.
Bitcoin surged above $37,000 to its highest price in 18 months, a rally fueled by more optimism that regulators could soon approve the first spot bitcoin exchange-traded fund. Bitcoin traded around $36,600.
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