U.S. Markets Weekly Economic News: Federal Reserve Continues Pause
The Federal Reserve maintained its policy rate within the 5.25%-5.50% range during its November 1 meeting. Jerome Powell, the Fed Chair, highlighted the complexities faced in deciding how to best handle the current economic environment. Is further tightening needed to bring down inflation or does the economy's strong performance warrant further hikes? The central bank acknowledged the economy's robust growth in the third quarter, and market participants speculated that the Fed might be done raising rates. The post-meeting statement was largely taken as slightly dovish since it was noted that recent increases in long term treasury yields were themselves accomplishing intended economic tightening which takes some pressure off the Fed to make further upward revisions to the policy rate. Furthermore, recent upbeat surprises in economic data did not provoke the Fed to take a more hawkish stance with rates or rhetoric. 📑
Inflation remained a concern because the Fed's preferred measure, the annual change in the personal consumption expenditure price index, marked a 3.4% rate in September. That sticky inflation has been stable over the past three months of available data for July, August, and September. Powell noted that while inflation was decreasing, it was still above the 2% target, and a few months of good data were only the start of what would be needed to build confidence in a policy shift. 📑
U.S. Markets Weekly Economic News: Economic Data Releases
In October 2023, the ISM Manufacturing PMI dipped to 46.7, retreating from a 10-month peak of 49 recorded in September, and falling short of the anticipated figure of 49. This marked the eleventh month in a row that the US manufacturing sector experienced a downturn. The figures reflect the domino effect of the Federal Reserve's increased interest rates on this sector. There was a noticeable acceleration in the decline of new orders, which plunged to 45.5 from September's 49.2, continuing a downward trend for the fourteenth consecutive month. This was attributed to diminishing demand from both domestic and international markets. As a result, manufacturing output saw a deceleration to 50.4 from 52.5, nearly reaching a point of stagnation. This news was due to the significant drop in the backlog of orders, which fell slightly to 42.2 from 42.4. Employment in manufacturing also saw a reduction.
In September 2023, the tally of available job positions rose by 56,000, reaching a four-month high of 9.55 million and surpassing market predictions of 9.25 million.
In October 2023, the United States saw a growth of 150,000 jobs, a significant reduction from the revised September figures of 297,000. This mark fell short of the anticipated 180,000. This slowdown in job creation suggests a gradual deceleration in the labor market.
In October 2023, the U.S. saw its unemployment rate tick up to 3.9%, marginally surpassing both the projections and the prior month's rate of 3.8%. This uptick represents the most significant level of unemployment since January 2022, with the population of those without jobs climbing by 146,000 to reach 6.51 million. Concurrently, the number of people with employment dropped by 348,000, settling at 161.2 million.
The ISM Services PMI saw a decline to 51.8 in October 2023, hitting a five-month nadir and significantly trailing expectations of 53. "Sentiment among firms is mixed, with some optimistic about the current steady and stable business conditions and others concerned about such economic factors as inflation, interest rates and geopolitical events. Employment-related challenges are also prevalent, with comments about increasing labor costs, as well as shortages”, Anthony Nieves, Chair of the ISM Services Business Survey Committee said. 📑
A key element that contributed to the uplift in overall market mood was the announcement from the U.S. Treasury regarding the upcoming sale of $112 billion in longer-term securities during its quarterly refunding auctions the next week. The amount was marginally less than the initially anticipated $114 billion. This slight reduction seemed to alleviate some of the pressure on the bond market at a time when there were escalating concerns that the demand for Treasuries might not be sufficient to match the growing supply needed to finance the burgeoning federal debt.
These developments collectively led to a significant drop in long-term Treasury yields throughout the week. The yield on the benchmark 10-year U.S. Treasury note fell sharply, descending from 4.88% to an intraday low of 4.484% on Friday. This downward move marks the lowest point since the latter part of September. 📑
After the Fed press conference and as the 10-year U.S. Treasury yield plunged, the S&P500 index surged upward as shown in Figure 1 below. The Friday October 27th intraday low now becomes the third test of a new support trendline which we will monitor going forward. The importance of the other two trendlines in the area which SPX price action crossed haphazardly since late September now has to be seriously questioned.
FIGURE 1 - A daily chart of SPX showing the past week's price action rebound
U.S. Markets Weekly Economic News: 3Q Earnings Mixed
The third quarter 2023 earnings season is showing a mix of results and outlooks from various sectors. So far, a significant portion of companies within the S&P 500 has surpassed earnings estimates, but there's a trend of lower revenue beats. The overall sentiment is cautious, with limited visibility into future market conditions. 📑
Cost optimization is a key focus across sectors as companies aim to maintain profit margins and cash flow despite pressures on revenue. In the industrial sector, although revenue has often been below estimates, earnings are solid, supported by easing supply chain issues and moderated input costs. The consumer discretionary sector is facing challenges due to rising interest rates affecting demand. 📑
Banks and financial services, particularly larger banks, have shown strength with profitable growth driven by increased interest income. Smaller banks are struggling with higher deposit interest rates and potential regulatory changes. Delinquency rates are returning to pre-pandemic levels, and cost management remains critical. 📑
In technology, major companies like Alphabet, Amazon, Microsoft, and Meta have reported strong earnings, but the market response has been tepid. AI technology remains a focal point for investors, and companies are emphasizing cost optimization in response to macroeconomic concerns and customer cost-saving efforts. 📑
These reports suggest that companies are weathering a complex economic environment with varying degrees of success. While some industries like finance are capitalizing on current conditions, others are feeling the squeeze on their top lines and are trying to adapt by improving operational efficiencies. Overall, the guidance provided by companies reflects caution with a keen emphasis on navigating through uncertain economic waters.
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