Month-In-Review: October 2023

Longer-run rates continued their ascension with the 10-year breaching 5% on October 23rd?for the first time since 2007, convincing some Fed officials policy firming may be complete.?At the same time, third-quarter growth surged at a near 5% pace, the most in seven quarters, labor market hiring accelerated, and the consumer ramped up retail spending, suggesting already 525bps in tightening has done little to result in a period of below-trend growth needed to reinstate price stability. Investors were convinced early on the Fed would remain on the sideline for another month, particularly amid uncertainty abroad, however, Federal Reserve Chairman Jerome Powell was clear further policy action is likely should inflation concerns remain.????

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Market Activity and Commodities

·?????? Equities – Stocks ended with sizable losses in October, marking the third consecutive month of losses and the worst October in five years. Beginning at 4,288.05, the S&P 500 slid 2.2% in October, closing at 4,193.80. Additionally, the Nasdaq declined 2.8% in October, closing at 12,851.24. The Dow, meanwhile, fell 1.4%, declining from 33,507.50 to 33,052.87. Year-to-date, however, the S&P 500 gained 9.2%, the Nasdaq is up 22.8%, while the Dow fell 0.3%.

·?????? Treasuries – Treasury yields moved higher in October after finishing higher in September. The 10-year Treasury yield jumped 36bps from 4.57% to 4.93%, breaching 5% on October 23rd for the first time since 2007. The 2-year Treasury yield, meanwhile, ended October up 4bps at 5.09%.

·?????? Oil & Gas????????????

o?? (Oct 18) – Oil prices rose after Iran reportedly called for an oil embargo against Israel. Up more than $7 since the start of the year, prices rose 1% to $87.55 a barrel.?

National Growth and Outlook

• NFIB Small Business Optimism (Oct 10) – The NFIB Small Business Optimism Index declined from 91.3 to a reading of 90.8 in September, more than the expected fall to 91.0 and a four-month low.

·?????? Leading Index (Oct 19) – The Leading Index declined 0.7% in September, more than the 0.4% decrease expected and following a 0.5% drop the month prior.

·?????? Chicago Fed National Activity Index (Oct 23) – The Chicago Fed National Activity rose from -0.22 to a reading of +0.02 in September, a two-month high. According to the median forecast, the index was expected to rise to -0.14. The Chicago Fed Index draws on 85 economic indicators; a reading below zero indicates below-trend growth in the national economy and a sign of easing pressures on future inflation. In September, 47 of the 85? monthly individual indicators made positive contributions, while 37 made negative contributions.

·?????? GDP (Oct 26) – GDP accelerated 4.9% on an annualized basis in the preliminary Q3 report, following a 2.1% gain in the second quarter and marking the fastest quarterly pace since Q4 2021. According to the median estimate on Bloomberg, activity July to September was expected to rise 4.5%. In the details of the report, personal consumption rose 4.0% in the first-round Q3 report following a 0.8% gain in Q2. Goods consumption, meanwhile, rose 4.8%, due to a 7.6% gain in durable goods and a 3.3% increase in nondurables consumption. Services consumption rose 3.6% in Q3 following a 1.0% gain the quarter prior. Gross private investment, meanwhile, rose 8.4%, marking the fastest quarterly gain in seven quarters. Fixed investment rose 0.8% following a 5.2% gain in the second quarter. Nonresidential investment, including office buildings and factories, however, declined 0.1% due to a 3.8% drop in equipment investment. Intellectual property investment, meanwhile, rose 2.6%, and structures investment increased 1.6% in the preliminary Q3 print. Residential investment rose 3.9%, following nine consecutive quarters of decline. On the trade side, exports rose 6.2% and imports increased 5.7% in the first-round Q3 report. Finally, government consumption rose 4.6%. Federal spending increased 6.2%, national defense spending rose 8.0%, and state and local spending gained 3.7% in the preliminary Q3 report.

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Employment

• JOLTS (Oct 3) – The number of job openings according to JOLTS – the Job Openings and Labor Turnover Survey – rose from 8.9M to 9.6M, topping all estimates and marking a three-month high. The quits rate, meanwhile, held steady at 2.3%, the lowest since January 2021.
• Jobless Claims (Oct 5) – Initial jobless rose 2k from 205k to 207k in the week ending September 30. The four-week average, however, declined from 211k to 209k, the lowest since February. Continuing claims, or the total number of Americans claiming ongoing unemployment, remained roughly unchanged at 1.7M in the week ending September 23. (Oct 12) – Initial jobless claims remained at 209k in the week ending October 7 for the second consecutive week following the revision of the initial 207k print. The four-week average, however, fell from 209k to 206k. Continuing claims, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.67M to 1.70M in the week ending September 30.? (Oct 19) – Initial jobless claims unexpectedly dropped 13k from 211k, revised up from 209k, to 198k in the week ending October 14, the lowest level since January. The four-week average declined from 207k to 206k. However, continuing claims, or the total number of Americans claiming ongoing unemployment, rose from 1.705M to 1.734M in the week ending October 7. (Oct 26) – Initial jobless rose 10k from 200k to 210k in the week ending October 21, a two-week high. The four-week average ticked up from 206k to 208k. Continuing claims, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.7M to 1.8M in the week ending October 14.
• Nonfarm Payrolls (Oct 6) – Nonfarm payrolls rose by 336k in September, more than double the 170k gain expected according to Bloomberg and the strongest pace of job creation since January. Meanwhile, August payrolls were revised higher from a 187k gain to a 227k increase. With additional revisions to previous months, the?overall change in nonfarm payrolls (September data + net revisions) was 455k. Private payrolls rose by 263k in September following a 177k gain in August. Goods-producing payrolls rose by 29k due to an 11k rise in construction payrolls and a 17k gain in manufacturing payrolls. Private service producing payrolls rose by 234k in September, up from a 130k gain in August. Leisure and hospitality payrolls led the gain in service payrolls in September, rising 96k following a 44k rise the month prior. Also, education and health payrolls rose 70k, and trade and transport payrolls rose 45k at the end of Q3 due to a 20k gain in retail trade payrolls. Additionally, professional and business services payrolls rose 21k, despite a 4k drop in temporary help payrolls, and financial payrolls gained 3k. On the other hand, information payrolls declined 5k in September. Finally, government payrolls rose by 73k in September following a 50k gain in August.
• Participation Rate (Oct 6) – The labor force rose by 90k following a 736k rise in August. Thus, the participation remained steady at 62.8% in September, matching the highest rate since February 2020. At 62.8%, however, the participation rate is still below the pre-pandemic rate of?63.3%.
• Unemployment Rate (Oct 6) – Household employment rose by 86k in September following a 222k increase the month prior. With a 90k rise in the labor force, the unemployment rate unexpectedly remained at 3.8% in September for the second consecutive month, matching the highest level of joblessness since February 2022. According to the median forecast, the unemployment rate was expected to decline to 3.7%.
• Average Hourly Earnings (Oct 6) – Average hourly earnings rose 0.2% in September, a tenth of a percentage point less than expected and following a similar increase in August. Year-over-year, wages rose 4.2%, down from the 4.3% annual gain in August and the weakest gain since June 2021.
• Average Weekly Hours (Oct 6) – The average workweek remained at 34.4 hours in September.

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Consumer Activity and Confidence

• Vehicle Sales (Oct 3) – Total vehicle sales rose from 15.04m to a 15.67m unit pace in September, more than the expected increase to 15.40m and a two-month high. Over the past 12 months, vehicle sales rose 14.4%, up from the 13.7% gain the month prior.
• Consumer Credit (Oct 6) – Consumer credit unexpectedly dropped by $15.6b in August, the largest decline in three years, and a reflection of a drop in non-revolving credit tied to student loan forgiveness. According to the median forecast, consumer credit was expected to rise by $11.7b in August.
• Retail Sales (Oct 17) – Retail sales rose 0.7% in September, surpassing the 0.3% gain expected and following an upwardly revised 0.8% gain in August. Year-over-year, retail sales rose 3.8% in September, up from the 2.9% annual rise in August and the largest monthly annual increase since February. Car sales rose 1.0% in September following a 0.4% increase the month prior, and gasoline stations sales gained 0.9% following a 6.7% jump in August. Excluding autos, retail sales rose 0.6% in September and climbed 3.2% over the past 12 months. Excluding autos and gasoline, retail sales rose 0.6% and increased 4.0% year-over-year. Finally, excluding food, autos, building materials and gasoline station sales, control group sales rose 0.6% in September and 3.8% over the past 12 months. In the details of the report, miscellaneous sales jumped 3.0%, non-store retailer sales climbed 1.1%, and eating and drinking sales rose 0.9% in September. Also, health and personal care sales rose 0.8%, food and beverage sales gained 0.4%, and general merchandise sales also rose 0.4% despite no change (0.0%) in department store sales. On the weaker side, furniture sales and sporting goods sales were both flat (0.0%), while building materials sales declined 0.2%, and clothing sales and electronics sales both dropped 0.8% in September.
• University of Michigan Consumer Sentiment (Oct 13) – The University of Michigan Consumer Sentiment Index plunged from 68.1 to a reading of 63.0 in the preliminary October report, a five-month low. According to the median forecast, the index was expected to decline to 67.0. In the details of the report, a gauge of current conditions declined from 71.4 to 66.7, and a gauge of future expectations fell from 66.0 to 60.7 in October, the lowest reading since May. (Oct 27) – The University of Michigan Consumer Sentiment Index was revised up from a reading of 63.0 to a reading of 63.8 in the final October report, still a five-month low. In the details of the report, a gauge of current conditions was revised up from 66.7 to 70.6, while a gauge of future expectations was revised down from 60.7 to 59.3, a five-month low.
• Consumer Spending and Income (Oct 27) – Personal income rose 0.3% in September, a tenth of a percentage point less than expected according to Bloomberg and following a 0.4% increase in August. Consumer spending, meanwhile, increased 0.7% in September, more than the 0.5% gain expected and following a 0.4% rise in August. Year-over-year, consumer spending increased 5.9% and personal income rose 4.7%. Adjusting for inflation, real consumer spending rose 0.4%, while real income fell 0.1% in September, the third consecutive monthly decline.?Over the past 12 months, real spending rose 2.4%, and real disposable personal income gained 1.2% following a 1.3% annual gain in August.
• Consumer Confidence (Oct 31) – Consumer confidence, according to the Conference Board, declined from 104.3 to a reading of 102.6 in October, less than the expected drop to 100.5, albeit a five-month low. In the details of the report, a gauge of current conditions declined from 146.2 to 143.1, the lowest since November of last year, and a gauge of future expectations fell from 76.4 to 75.6 in October, the lowest reading since May.

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Inflation

• PPI (Oct 11) – The Producer Price Index (PPI) rose 0.5% in September, more than the 0.3% gain expected and following a 0.7% increase the month prior.? Year-over-year, producer prices rose?2.2% in September, up from the 2.0% gain in August and marking the largest increase in five months. Food prices rose 0.9% following a 0.5% decline the month prior, while energy prices gained 3.3% in September following a 10.3% jump in August. Excluding food and energy costs, the core PPI rose 0.3%, a tenth of a percentage point more than expected and following a 0.2% increase in August. Year-over-year, the core PPI increased 2.7% in September, up from the 2.5% gain in August. Additionally, services costs rose 0.3%, due to a 0.5% gain in trade costs. Transportation and warehousing costs, however, fell 0.4% in September.
• CPI (Oct 12) – The Consumer Price Index (CPI) rose 0.4% in September, a tenth of a percentage point more than expected and following a 0.6% gain in August. Year-over-year, consumer prices rose 3.7%, matching the 3.7% pace reported the month prior. Food prices rose 0.2%, and energy prices increased 1.5% in September following a 5.6% gain in August. Excluding food and energy costs, the core CPI rose 0.3%, as expected and following a similar increase the month prior. Year-over-year, the core CPI increased 4.1%, down from the 4.3% gain in August and the smallest annual gain since September 2021. In the details of the report, commodities prices rose 0.1%, and transportation prices gained 0.3%, due to a 0.3% increase in new vehicle prices. Used cars and trucks prices, however, fell 2.5%, the fourth consecutive month of decline. Additionally, airline fares rose 0.3% in September following a 4.9% gain the month prior. Also, medical care prices increased 0.3%, other goods and services costs gained 0.6%, and shelter prices also increased 0.6%, due to a 0.6% rise in the OER. Education and communication prices gained 0.1%, and recreation prices rose 0.4% in September. Excluding food, energy, and shelter costs, the CPI rose just 0.1% in September and 2.0% over the past 12 months.
• PCE (Oct 27) – The PCE rose 0.4% in September, a tenth of a percentage point more than expected and following a similar increase in August. Year-over-year, headline inflation increased 3.4%, as expected and following a similar annual gain in August. Excluding food and energy, the core PCE rose 0.3% in September, in line with expectations. Year-over-year, core inflation increased 3.7%, down from a 3.8% annual increase last month.

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Manufacturing and Production Activity

• ISM Manufacturing (Oct 1) – The ISM Manufacturing Index rose from 47.6 to 49.0 in September, more than the expected gain to 48.6, albeit still signaling contraction (a reading below 50) for the 11th straight month. In the details of the report, employment rose from 48.5 to 51.2, new orders increased from 46.8 to 49.2, and production improved from 50.0 to 52.5. On the other hand, prices fell from 48.4 to 42.8 in September.
• ISM Services (Oct 4) – The ISM Services Index declined from 54.5 to 53.6 in September, in line with the expected decline to 53.5 and a two-month low. In the details of the report, supplier deliveries ticked up from 48.5 to 50.4, and backlog of orders rose 6.8 points to a reading of 48.6 in September. On the other hand, prices paid remained at 58.9 for the second consecutive month, averaging a reading of 57.4 over the past six months, while new orders declined from 57.5 to 51.8, and employment fell 1.3 points to 53.4 in September, the lowest reading in two months.
• Empire Manufacturing (Oct 16) – The Empire Manufacturing Index fell from +1.9 to a reading of -4.6 in October, a two-month low. According to the median forecast, the index was expected to decline to -6.0. In the details of the report, prices paid fell from 25.8 to 25.5, a two-month low, and prices received decreased from 19.6 to 11.7 in October, a three-month low. Additionally, new orders plunged from +5.1 to -4.2, and the six-month general business conditions index declined from 26.3 to 23.1, the lowest reading since July. On the other hand, the number of employees rose from -2.7 to +3.1, a three-month high, and inventories ticked up from -6.2 to -2.1 in October.
• Industrial Production (Oct 17) – Industrial production unexpectedly rose 0.3% in September following a 0.4% increase in August. According to the median forecast, production was expected to be flat (0.0%).
• Capacity Utilization (Oct 17) – Capacity utilization rose from 79.5% to 79.7% in September, a five-month high.
• Philly Fed Business Outlook Survey (Oct 19) – The Philly Fed Index rose from -13.5 to -9.0 in October, falling short of the expected gain to -7.0, albeit a two-month high. In the details of the report, employment rose from -5.7 to +4.0, shipments climbed from -3.2 to +10.8, and new orders gained from -10.2 to +4.4 in October. On the other hand, prices paid declined from 25.7 to 23.1, delivery times dropped from -14.9 to -21.4, and inventories decreased from +8.9 to -7.0. Also, the six-month outlook index inched down from 11.1 to 9.2 in October, a two-month low.
• Richmond Fed Manufacturing (Oct 24) – The Richmond Fed Manufacturing Index declined two points to a reading of 3 in September as expected and a two-month low. In the details of the report, shipments gained two points to a reading of +9 in October, the highest reading since September 2022. On the other hand, new order volume fell from +3 to -4, order backlogs decreased ten points to -17, and capacity utilization plunged from +6 to a reading of -6. The number of employees, however, remained at +7 in September, matching the highest reading since June 2022.
• Durable Goods (Oct 26) – Durable goods orders rose 4.7% in September following a 0.1% decline in August. According to the median estimate on Bloomberg, durable goods orders were expected to increase 1.9%. Year-over-year, headline orders rose 7.8% in September, up from the 3.3% annual increase the month prior. Transportation orders rose 12.7% following a 1.1% decline the month prior, due to a 92.5% gain in civilian aircraft orders. Vehicle and parts orders, however, fell 1.0%. Excluding transportation, durable goods orders rose 0.5% in September, and increased 1.7% over the past 12 months. In other details, computers and electronics orders increased 1.0%, and machinery orders, electrical equipment orders as well as fabricated metals orders all rose 0.9% in September. On the other hand, primary metals orders decreased 0.4% in September.
• Capital Goods (Oct 26) – Capital goods orders rose 13.9% in September. Nondefense capital goods orders, meanwhile, gained 18.6% following a 3.1% decrease in August. Capital goods orders excluding aircraft and defense – a proxy for business investment – rose 0.6% in September following a 1.1% rise the month prior. Year-over-year, business investment increased 2.4%, up from the 0.5% annual gain in August.
• Kansas City Fed Manufacturing (Oct 26) – The Kansas City Fed Index remained at a reading of -8 in October for the second consecutive month. In the details of the report, shipments rose four points to -11, and production gained from -13 to -8. On the other hand, prices paid dropped from +7 to -2, the volume of new orders decreased from -14 to -22, and employment plunged from a reading of +2 to -4 at the start of the fourth quarter. Additionally, the six-month outlook remained at a reading of +1 in October.
• Dallas Fed Index (Oct 30) – The Dallas Fed Manufacturing Activity Index unexpectedly declined from -18.1 to -19.2 in October, a three-month low and the 18th consecutive month of a negative print. The index was expected to rise to -16.0, according to the median forecast. In the details of the report, capacity utilization fell from +7.8 to +5.4, production declined from +7.9 to +5.2, and employment decreased from a reading of +13.6 to +6.7, a two-month low. Also, new orders slipped from -5.2 to -8.8 in October, averaging -13.4 over the past six months. On the other hand, the six-month general business outlook index rose from -16.5 to -6.8 in October, a two-month high.
• Chicago PMI (Oct 31) – The Chicago PMI unexpectedly ticked down from 44.1 to 44.0 in October, a three-month low. According to the median forecast, the index was expected to rise to 45.0. In the details of the report, prices paid and employment rose, while supplier deliveries, production, inventories and order backlogs fell, signaling contraction.

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Housing Market Activity

• Construction Spending (Sep 1) – Construction spending rose 0.5% in August following a 0.9% gain the month prior. Over the past 12 months, construction spending increased 7.4%, the largest gain since September of last year.
• NAHB Housing Market Index (Oct 17) – The NAHB Housing Market Index declined by four points to a reading of 44 in October, as expected and a nine-month low.
• Building Permits (Oct 18) – Building permits declined 4.4% in September, pulling the annual pace down from 1.541M to 1.473M, a two-month low. Building permits were expected to fall 5.7% in September, according to Bloomberg. Single family permits rose 1.8%, while multi-family permits declined 14.3%. Year-over-year, building permits declined 7.2% in September following a 2.8% decrease in August, and marking the fourteenth consecutive month of decline.
• Housing Starts (Oct 18) – Housing starts rose 7.0% in September, pulling the annual pace up from 1.269M to 1.358M, a two-month high. Starts were expected to rise 7.8%, according to the median forecast on Bloomberg. Single family starts increased 3.2%, and multi-family starts climbed 17.6%. Year-over-year, housing starts fell 7.2% in September following a 15.7% drop in August. ?
• Existing Home Sales (Oct 19) – Existing home sales fell 2.0% from 4.04m to a 3.96m unit pace in September, the lowest level since 2010. According to the median estimate on Bloomberg, existing sales were expected to decline 3.7%. Year-over-year, existing home sales declined 15.4% in September, the 26th consecutive month of decline, and down from the 15.3% drop in August. Due to a fall in sales, the months’ supply of existing homes ticked up from 3.3 months to 3.4 months, averaging 3.3 months over the past three months. From a price standpoint, the median cost of a previously owned home rose 2.8% in September from a year earlier to $394k, down from the $404k median price reported in August.
• New Home Sales (Oct 25) – New home sales jumped 12.3% in September from 676k to 759k, the most since February of last year. According to the median forecast, new home sales were expected to rise just 0.7%. Over the past 12 months, sales rose 33.9%, up from the 6.0% gain the month prior. Due to a rise in sales, the months’ supply of new homes fell from 7.7 months to 6.9 months, the lowest since February 2022. From a price standpoint, the median cost of a newly constructed home fell 3.3% from the month prior to $419k. Year-over-year, new home prices decreased 12.3% in September following a 1.6% decline in August.
• Pending Home Sales (Oct 26) – Pending home sales unexpectedly rose 1.1% in September following a 7.1% drop the month prior. According to the median forecast, pending home sales were expected to decline 2.0%. Over the past 12 months, pending home sales dropped 13.1%, the 22nd consecutive month of decline.
• S&P/CS 20 City & National Index (Oct 31) – The S&P Case-Shiller 20 City Home Price Index jumped 1.01% in August, surpassing the 0.80% gain expected and the fastest pace since May of this year. The National Composite Index, meanwhile, increased 0.90% in August following a 0.65% gain in July. At 0.90%, this marks the fastest increase since May of last year. Over the past 12 months, the 20-city home price index rose 2.2% and the national composite index gained 2.6%, both marking a seven-month high.

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Trade and Currency

• U.S. Dollar (Oct 24) – The U.S. dollar gained ground following fresh economic data highlighting the strength of the U.S. economy despite higher interest rates. The S&P Global Manufacturing PMI ticked higher as did the services PMI in the preliminary October report. The dollar rose 0.6% against a basket of currencies to $106.27.
• Trade Balance (Oct 5) – The U.S. trade deficit narrowed 9.9% to $58.3b in August, the smallest in almost three years. According to the median estimate on Bloomberg, the deficit was expected to narrow to $59.8b. Imports fell 0.7% to $314.3b, a two-month low, while exports increased 1.6% to $256.0b in August, a five-month high.
• Import & Export Prices (Oct 13) – Import prices rose 0.1% in September, falling short of the 0.5% gain expected and following a 0.6% increase in August. Export prices, however, rose 0.7%, more than the 0.5% gain expected and following a 1.1% rise the month prior. Over the past 12 months, however, import prices fell 1.7% and export prices plunged 4.1%.

?Monetary Policy, Reports, and Commentary

• Atlanta Fed GDPNow Forecast

o?? (Oct 27) – Following a stronger-than-expected rise in third-quarter growth, the initial Atlanta Fed GDPNow forecast for fourth-quarter growth was reported at 2.3%. At 2.3%, this would mark a two-quarter low.

• Fed Speak/News (Oct 3) – Atlanta Fed President Raphael Bostic said investors should be bracing for an ongoing higher-for-longer scenario. Speaking at an event in Atlanta, Bostic said the Fed is likely to hold rates at elevated levels "for a long time.” He went on to say, “I am not in a hurry to raise, but I am not in a hurry to reduce either.” ?(Oct 3) – Cleveland Fed President Loretta Mester continued to call for at least one additional rate hike by year-end as the Fed continues to fight inflation. Speaking at an event organized by the 50 Club of Cleveland , Mester said one more hike might be needed this year. “I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time as we accumulate more information on economic developments and assess the effects of the tightening in financial conditions that has already occurred,” Mester noted. (Oct 5) – Despite uncertainty in the outlook and volatility in the markets, Chicago Fed President Austan Goolsbee is confident that monetary policy officials can navigate a soft landing. While he conceded that the recent backup in rates appears somewhat irrational given the Fed’s higher for longer message is largely on par with the communication of the last six months, Goolsbee is confident the economy is on “the golden path to the mother of all soft landings.”?“I think the puzzle that people are trying to put together is, well, why did it happen in the last three weeks? But if you take a six-month perspective, in a way, I don't think it's that much of a puzzle — it's clear that the long rates coming up is what you'd expect.” (Oct 10) – According to Dallas Fed President Lorie Logan, the recent backup in rates may preclude the Fed from having to raise rates further. Speaking at the National Association for Business Economics (NABE) meeting in Dallas, Logan said, "I expect that continued restrictive financial conditions will be necessary to restore price stability in a sustainable and timely way," adding that financial conditions have become "notably" tighter in recent months. (Oct 10) – Speaking at the NABE meeting in Dallas, Fed Governor Philip Jefferson indicated higher longer-term yields may mitigate the need for additional rate hikes, at least at the November meeting. “I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy,” Jefferson said. (Oct 11) – According to Fed Governor Michelle Bowman, rates may need to rise further and stay higher for longer. Speaking at an event in Marrakech, Morocco, she said, “Inflation remains well above the FOMC’s 2% target. Domestic spending has continued at a strong pace, and the labor market remains tight. This suggests that the policy rate may need to rise further and stay restrictive for some time to return inflation to the FOMC’s goal.”? (Oct 11) – Minneapolis Fed President Neel Kashkari also appeared to be maintaining a more hawkish stance on policy,?noting he is not yet convinced that the latest rally in long-term Treasury yields would reduce the need for further rate hikes, although he noted the recent move in Treasury rates is “perplexing.” It depends, he said, on what is driving the recent rise, optimism about the economy or higher government borrowing? “It’s certainly possible that higher long-term yields may do some of the work for us in terms of bringing inflation back down…But if those higher long-term yields are higher because their expectations about what we’re going to do has changed, then we might actually need to follow through on their expectations in order to maintain those yields.” (Oct 17) – While the pathway for inflation “isn’t yet clear,” according to Richmond Fed President Thomas Barkin, “we have time to see if we have done enough, or whether there’s more work to do.”?In other words, after the September pause perhaps the Committee should remain on the sideline longer until there is more evidence in one direction or the other to drive future policy, particularly given the recent events overseas and the market reaction. (Oct 17) – Speaking at the University of Minnesota, Minneapolis Fed President Neel Kashkari reiterated the Fed’s dual mandate and noted that inflation is “still too high” and went on to say, “It has taken much longer than we expected to come down.” (Oct 18) – Fed Governor Christopher Waller noted that the Fed could wait and see if the data warrants further monetary restraint. Speaking at an event for the European Economics and Financial Center in London, Waller said, “I believe we can wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate.” Waller went on to note that he would be closely watching the data to see “whether the real side of the economy begins to cool off or whether prices, the nominal side of the economy, heat up.” (Oct 18) – Speaking in an interview with The Wall Street Journal, Philadelphia Fed President Patrick Harker noted that the Fed can pause rate hikes: "This is a time where we just sit for a little bit. It may be for an extended period; it may not. But let's see how things evolve over the next few months." (Oct 18) – New York Fed President John Williams noted that rates need to be restrictive for “some time.” Speaking during a moderated conversation at Queens College in New York, Williams said, “We’re going to stick at it to make sure that we really achieve that goal of 2% on a sustained basis…We need to keep this restrictive stance of policy in place for some time.” (Oct 18) – Fed Governor Lisa Cook spoke on the Fed’s dual mandate at the 2023 Future of Black Communities Summit’s Louis E. Martin ceremony in Washington. Without commenting on future monetary policy, she specifically spoke about maximum employment. Cook noted, “The past three decades have shown that unemployment can fall well below the levels that economists once predicted would overheat the economy.” (Oct 18) – Fed Governor Michelle Bowman gave opening remarks at a Fed Listens event in Richmond, noting “inflation has come down, but we know that it is still too high.” (Oct 19) – Speaking to the Economic Club of New York, Chair Powell suggested that policy makers are willing and may need to raise rates further if inflationary concerns remain. While officials are moving “carefully,” he warned the strength of the economy, the labor market and the consumer could justify further policy firing. That being said, while Powell did not remove the possibility of a further rate hike from the table as many investors had hoped, he did note inflation expectations have not principally adjusted higher. As such, Powell suggested investors may be focused less on future policy tweaks and more on fundamental shifts in market support in the context of?fiscal deficits, quantitative tightening and domestic growth (expectations). Thus, the recent increase in long-term yields “doesn’t seem to be principally about us doing more.” (Oct 20) – Philadelphia Fed President Patrick Harker reiterated support for a pause in rate hikes. Speaking to the Philadelphia chapter of the Risk Management Association, Harker noted, “While I stand ready to revise my views and act accordingly if I see signs of reinflation, I am also not going to overreact to the normal month-to-month variability in data.”

·?????? September 20 FOMC Meeting Minutes (Oct 11)? ?

·?????? The September FOMC meeting minutes showed an ongoing expectation for a sustained period of higher rates. The majority of officials noted one additional rate increase would likely be "appropriate" to reach the Committee’s inflation target, while "some" said no further hikes would be necessary. Of course, while officials debate the final tweaks to policy and debate the terminal rate, more importantly, most expect rates to remain high for "some time." “All participants agreed that policy should remain restrictive for some time until the Committee is confident that inflation is moving down sustainably toward its objective,” the minutes read. Noting a solid economy and a somewhat better balance in labor market conditions, participants noted an improvement with the risk profile becoming more balanced. “Participants generally noted that it was important to balance the risk of overtightening against the risk of insufficient tightening.” Moving forward, “all participants” agreed that the Committee would “proceed carefully” and that policy decisions would remain data-dependent.

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Domestic News and Activity?

• Politics and the Biden Administration

• (Oct 4) – After successfully negotiating a bipartisan compromise to avert a government shutdown, Kevin McCarthy was removed from his position as Speaker of the House after assuming the top leadership post in January. The vote was 216 to 210 with eight Republicans voting alongside Democratic colleagues to remove McCarthy from the speakership, a form of punishment for breaking with the stringent demands of the most conservative right-wingers seeking deeper spending cuts. This was the first time in history that the House removed its leader, likely complicating the spending negotiations. Recall, the short-term spending agreement simply kicks the can down the road 45 days to November 17. The latest power shift also underscores more broadly the uncertainty and chaos growing in Washington as the 2024 presidential election nears.
• (Oct 4) – After the Supreme Court rejected the Biden administration’s proposal to extinguish the entire $1.6 trillion of student loan debt, the Biden administration announced plans to cancel an additional $9 billion in student-loan debt for public servants, Americans with disabilities and low-income borrowers. According to Bloomberg data, the newest round of debt forgiveness brings the total debt cancellation approved by the Biden administration to $127 billion, or 8% of the total outstanding. Unburdening roughly 3.6 million Americans from their student debt obligations directly, the sum is transferred as a collective burden?to the national balance sheet.
• (Oct 10) – Heading into the fourth week, the United Auto Workers strike expanded to Mack Trucks, which is owned by Volvo. After rejecting a proposed five-year labor contract, nearly 4k workers walked off the job, taking the total number of UAW members on strike to over 30,000.?As noted before, from a policy standpoint, while individual union strikes are unlikely to move the needle in terms of aggregate wage data or monthly rate decisions, the growing theme of higher compensation demands speaks to the ongoing, sticky nature of services costs and can cause ripple effects of rising expectations for both compensation and broader inflation, which in turn complicates the Fed’s ability to reach its inflation target.? ?
• (Oct 11) – The United Auto Workers (UAW) strike continued to expand, now incorporating 8.7K members at Ford Motors, taking the total number of autoworkers on strike to 38.7K. Already costing $5.5B in the first three weeks (according to the Anderson Economic Group) in lost wages and production, industry analysts estimate a sizable dividend reduction and potentially a 40% reduction in stock valuations should an agreement be met increasing labor costs 30% over the next 48 months.
• (Oct 23) – U.S. officials failed again to appoint leadership in the House of Representatives. According to reports, nine Republicans are running for House speaker after three failed attempts by Jim Jordan to garner enough support.
• (Oct 25) – Congressman Mike Johnson (LA-04) was finally elected as the Speaker of the House following three weeks of failed attempts. Johnson is a political conservative and relatively inexperienced as he was elected to Congress in 2016. Prior to his election to Congress in 2016, Speaker Johnson was an attorney and served in the Louisiana State Legislature from 2015 to 2017.
• (Oct 31) – It took longer than many had expected, but an end to the United Automobile Workers (UAW) strike appeared to be within reach with General Motors being the last of the Big Three Detroit automakers to reach a tentative deal.?Recall, the walkouts began back in September and involved almost 50k workers, totaling billions in lost production and wages.?According to reports, the deal entitles Union members to a “hefty double-digit pay raise,” restricts the use of lower-paid temporary workers, and gives workers influence over what plants stay open as the automakers shift to electric vehicles. While a win for workers in the industry, the impact of higher priced labor will materially raise costs for the automakers themselves, which will ultimately be passed along to consumers. Early estimates suggest the new deal with the UAW could potentially increase the cost of each car by up to $900.

International News and Activity?

·?????? Israel

o?? (Oct 10) – International conflict dominated headlines and the markets as investors try desperately to separate out geopolitical risks and the humanitarian impact with the potential longer-run implications for the international and domestic economy. In response to the attacks by Hamas, the Israeli military activated 300,000 reservists in a “massive mobilization.” President Biden directed a team to work with Israel counterparts "on every aspect of the hostage crisis, including sharing intelligence and deploying experts from across the United States government to consult with and advise Israeli counterparts on hostage recovery efforts."?

·?????? Canada

o?? (Oct 25) – The Bank of Canada opted to hold its key overnight rate steady at 5.0% for the second consecutive meeting.?With inflation still elevated at a current rate of 3.8%,?officials now expect inflation to average 3% in 2024, up from a 2.5% projection in July. At the same time, the economy is slowing markedly with the latest Q2 GDP report showing a decline of 0.2% and projections for Q3 subdued at 0.5%. While remaining on the sideline in September after 10 rate hikes, the governing council was clear it might not be done. According to a statement from the bank explaining its decision, the “Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed.”?

·?????? Europe

o?? (Oct 26) – The European Central Bank (ECB) paused rate hikes for the first time since July 2022. According to Bloomberg data, investors now anticipate rates to remain steady at 4.50% for the main refinancing rate, 4.75% for the marginal lending facility rate and 4.00% for the deposit rate for the next five to six months with a total of roughly 70bps of cuts priced in for next year.?

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-Lindsey Piegza, Ph.D., Chief Economist

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