Investors patiently waited, speculated and predicted the outcome of Wednesday’s US Fed rate announcement and the press conference following the two-day meeting of the FOMC. Leading up to the meeting, stocks were essentially unchanged. After the rate hike statement, initially, North American equity markets rose. Then, during Chairman Jerome Powell’s news conference, markets faded as the tone of the meeting turned hawkish. Equity markets turned negative and finished the week lower. The decline in equity markets was broad-based, with the growth and tech stocks falling the most after a number of the tech leaders reported disappointing earnings. The tech-laden Nasdaq fell 5.65%, the S&P 500 lost 3.35%, and the TSX fell 0.10%, supported by a 4.30% increase in oil prices. European markets held up despite the ECB’s 0.75% rate increase, as central banks signaled they might slow the rate increases. Most European indices moved well over 1.5% higher on the continent, with the UK jumping 4.07%. European inflation remains stubbornly high at over 10%.
On Tuesday, the Institute for Supply Management reported the closely watched Manufacturing PMI for October at 50.2, 0.7 percentage points lower than September’s 50.9 percent reading. (A reading over 50 indicates growth). The sub-indices were mixed, with the New Orders Index remaining in contraction territory with a reading of 49.2 percent, 2.1 percentage points higher than the September reading. The Production Index increased 1.7 percentage points to 52.3, while the Prices Index dropped 5.1 percentage points to 46.6. The latest level of the Prices Index is the lowest reading since May 2020 (40.8 percent). The Backlog of Orders Index plunged 5.6 percent to 45.3, and the Employment Index increased to 50 percent, up 1.3 percentage points from the September reading of 48.7 percentage points. The Suppliers Deliveries Index was down 5.6 percentage points to 46.8; the Inventories Index also fell three percentage points to 52.5 percent.1
The Labor Department on Tuesday said job listings increased to 10.7 million in September from the August print of 10.3 million. The number of hires slipped to the lowest level in 15 months, indicating businesses aren’t in a hurry to fill job openings. The quits rate slowed to 4.1 million. The latest job openings suggest the labor market remains more robust than the Fed would like to see.2 On Wednesday, the ADP private payroll release indicated employers created 239,000 jobs in October, stronger than September’s revised 192,000 new jobs. Not surprisingly, the goods-producing sectors lost 8,000 jobs while the service sector added 247,000.3
On Wednesday afternoon, the FOMC announced another 0.75% rate increase in line with street expectations. The initial statement acknowledged the lagging nature of past rate increases, suggesting to market participants that the tone was softening from earlier statements, considering economic indicators that the economy is slowing. However, later in the press conference Chairman Jerome Powell set the record straight and signaled that the terminal rate is higher than previously forecast. He added that rate hikes would continue “until they are sufficiently restrictive” to return inflation to the long-target goal of 2% over time.4 The aggressive tone of the Chairman dashed the optimism of the last couple of weeks, and correspondingly, the markets responded by reversing course and plunging by day’s end.
On Thursday, the Labor Department released the week’s initial jobless numbers for October 29. Adjusted claims decreased by 1,000 from the previous week to 217,000; continuing claims for the week ending October 15 from all programs increased by 28,929 to 1,250,555. On Friday, the government said in the latest nonfarm payroll reading the US economy added 261,000 new jobs in October, higher than the 205,000 jobs estimated. The unemployment rate increased to 3.7% from 3.5%. Beneficiaries of new job creation were healthcare (53,000 new jobs), professional businesses (43,000), leisure and hospitality (35,000), and manufacturing (32,000). 5
As the economy continues to slow, the pattern of investors is to incorrectly anticipate the US Fed’s stance on both the terminal rate and the velocity of rate increases. Between each Fed FOMC announcement, investor optimism grows with signs of slowing economic activity, only to be awakened to the reality facing the Fed. If the labor market remains strong and wage growth becomes entrenched, the Fed is likely to continue to disappoint investors. The recent disappointing earnings of the mega tech companies could be the beginning signs that higher rates are finally impacting businesses leading to enough weakness in the labor market to provide the Fed the cover necessary to slow the pace or even pause rate increases. Hopefully, that is not wishful thinking.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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