Category: Markets

Fed Signals No Rate Cuts Coming Despite Recession Fears

Posted on by slightbourne@noblecapitalmarkets.com

Despite growing fears of an impending recession, the Federal Reserve is showing no signs of pivoting towards interest rate cuts any time soon, according to minutes from the central bank’s early-November policy meeting.

The minutes underscored Fed officials’ steadfast commitment to taming inflation through restrictive monetary policy, even as markets widely expect rate cuts to begin in the first half of 2024.

“The fact is, the Committee is not thinking about rate cuts right now at all,” Fed Chair Jerome Powell asserted bluntly in his post-meeting press conference.

The summary of discussions revealed Fed policymakers believe keeping rates elevated will be “critical” to hit their 2% inflation target over time. And it gave no indication that the group even considered the appropriate timing for eventually lowering rates from the current range of 5.25-5.50%, the highest since 2000.

Despite investors betting on cuts starting in May, the minutes signaled the Fed intends to stand firm and base upcoming policy moves solely on incoming data, rather than forecasts. Officials stressed the need for “persistently restrictive” policy to curb price increases.

Still, Fed leaders acknowledged they must remain nimble in response to shifting financial conditions or economic trajectories that could alter the monetary path.

Surging Treasury Yields Garner Attention

This balanced posture comes after the early-November gathering saw extensive debate around rapidly rising Treasury yields, as 10-year rates hit fresh 15-year highs over 4.3%.

The minutes linked this upward pressure on benchmark yields to several key drivers, including increased Treasury issuance to finance swelling federal deficits.

Analysts say the Fed’s aggressive rate hikes are also forcing up yields on government bonds. Meanwhile, any hints around the Fed’s own policy outlook can sway rate expectations.

Fed participants decided higher term premiums rooted in fundamental supply and demand forces do not necessarily warrant a response. However, the reaction in financial markets will require vigilant monitoring in case yield spikes impact the real economy.

Moderating Growth, Elevated Inflation Still Loom

Despite the tightening already underway, the minutes paint a picture of an economy still battling high inflation even as growth shows signs of slowing markedly.

Participants expect a significant deceleration from the third quarter’s 4.9% GDP growth pace. And they see rising risks of below-trend expansion looking ahead.

Nevertheless, on inflation, officials suggested hazards remain tilted to the upside. Price increases slowed to a still-high 7.7% annual clip in October per CPI data, but stickier components like rents and services have been slower to relent.

The Fed’s preferred PCE inflation gauge has also moderated over recent months. But at 3.7% annually in September, it remains well above the rigid 2% target.

Considering lags in policy impacts, the minutes indicated Fed officials believe the cumulative effect of 375 basis points worth of interest rate hikes this year should help restore price stability over the medium term.

Markets Still Misaligned with Fed’s Outlook

Despite the Fed’s clear messaging, futures markets continue to forecast rate cuts commencing in the first half of 2023. Traders are betting on a recession forcing the Fed’s hand.

However, several Fed policymakers have recently pushed back on expectations for near-term policy pivots.

For now, the Fed seems inclined to stick to its guns, rather than bowing to market hopes or economic worries. With inflation still unacceptably high amid a strong jobs market, policymakers are staying the course on rate hikes for the foreseeable future, according to the latest minutes.

Millions of Gig Workers May Be Missing from Monthly Jobs Data

Posted on by slightbourne@noblecapitalmarkets.com

Each month the U.S. Labor Department releases its closely-watched jobs report, providing key employment statistics that the Federal Reserve monitors to gauge the health of the economy. However, new research suggests these monthly figures may be significantly undercounting workers, specifically those in the rising “gig economy.”

Economists estimate the undercount could range from hundreds of thousands to as many as 13 million gig workers. This discrepancy suggests the labor market may be even tighter than the official statistics indicate, allowing more room for employment growth before hitting problematic levels of inflation.

Gig Workers Slip Through the Cracks

Gig workers, such as Uber drivers, freelancers, and casual laborers, often don’t consider themselves part of the workforce or even “employed” in the traditional sense. As a result, when responding to government labor surveys, they fail to identify themselves as active participants in the job market.

Researchers Anat Bracha and Mary Burke examined this response pattern by comparing informal work surveys with standard employment surveys. They uncovered a troubling gap where potentially millions of gig workers get missed each month in the jobs data.

For the Fed, Underestimating Tightness Raises Risks

For the Federal Reserve, accurate employment statistics are critical to promoting its dual mandate of stable prices and maximum employment. If the labor market is tighter than the data suggests, it could force Fed policymakers to act more aggressively with interest rate hikes to ward off inflationary pressures.

An undercount means the economy likely has more remaining labor supply before hitting problematic levels of inflation-fueling tightness. With more Americans able to work productively without triggering price hikes, the Fed may not need to cool off the job market as quickly.

Implications for Fed Policy Decisions

In recent years, the Fed has dramatically revised its estimates for full employment to account for the lack of rising inflation despite ultra-low unemployment. Recognizing millions more gig workers could further adjust views on labor market capacity.

According to the researchers, the uncounted gig workers indicate the economy has had more room to grow without excessive inflation than recognized. As a result, they argue the Fed’s benchmark for tight labor markets could be revised upwards, allowing for less aggressive rate hikes.

Gig Workforce Expected to Expand Post-Pandemic

The gig economy workforce has swelled over the past decade. But the COVID-19 pandemic triggered massive layoffs, confusing estimates of its true size.

As the economy rebounds, gig work is expected to continue expanding. Younger generations show a preference for the flexibility of gig roles over traditional 9-to-5 employment. Moreover, companies are incentivized to hire temporary contract laborers to reduce benefit costs.

Accurately capturing this crucial and expanding segment of the workforce in monthly jobs data is necessary for the Fed to make informed policy moves. The research highlights an urgent need to refine labor survey approaches to avoid missteps.

Adapting Surveys to Evolve with the Economy

Government surveys designed decades ago need to adapt to reflect the rapidly changing nature of work. Respondents should be explicitly asked whether they engage in gig work and probed on their monthly hours and earnings.

Modernizing measurement approaches could reveal a hidden bounty of untapped labor supply and productivity from gig workers. With more accurate insight into true employment levels, the Fed can better balance its dual goals and promote an economy that benefits all Americans.

Stock Markets Rally Back: A Beacon of Hope Emerges

Posted on by slightbourne@noblecapitalmarkets.com

After a tumultuous year marked by soaring inflation, rising interest rates, and economic uncertainty, the stock markets are finally beginning to show signs of recovery. The recent surge in the Russell 2000, a small-cap index, is a particularly encouraging sign, indicating that investors are regaining confidence and seeking out growth opportunities. This positive momentum is fueled by several factors, including signs of inflation subsiding, the likelihood of no further rate hikes from the Federal Reserve, and renewed interest in small-cap companies.

Inflation Under Control

The primary driver of the market’s recent rally is the easing of inflationary pressures. After reaching a 40-year high in June, inflation has been steadily declining, with the latest Consumer Price Index (CPI) report showing a year-over-year increase of 6.2%. This moderation in inflation is a welcome relief for investors and consumers alike, as it reduces the burden on household budgets and businesses’ operating costs.

No More Rate Hikes on the Horizon

In response to the surge in inflation, the Federal Reserve embarked on an aggressive monetary tightening campaign, raising interest rates at an unprecedented pace. These rate hikes were necessary to curb inflation but also had a dampening effect on economic growth and put downward pressure on stock prices. However, with inflation now on a downward trajectory, the Fed is expected to slow down its rate-hiking cycle. This prospect is positive for the stock market, as it reduces the uncertainty surrounding future interest rate decisions and allows businesses and investors to plan accordingly.

Capital Flows Back to Small Caps

The recent rally in the Russell 2000 is a testament to the renewed interest in small-cap companies. These companies, often considered to be more sensitive to economic conditions than their larger counterparts, have been hit hard by the market volatility of the past year. However, as investors become more optimistic about the economic outlook, they are turning their attention back to small caps, which offer the potential for higher growth and returns.

Light at the End of the Tunnel

The stock market’s recent rally is a promising sign that the worst may be over for investors. While there may still be challenges ahead, the easing of inflation, the prospect of no further rate hikes, and the renewed interest in small-cap companies suggest that there is light at the end of the tunnel. As investors regain confidence and seek out growth opportunities, the stock market is poised for a continued recovery.

Additional Factors Contributing to the Rally

In addition to the factors mentioned above, there are a few other developments that are contributing to the stock market’s recovery. These include:

  • Strong corporate earnings: Despite the economic slowdown, many companies have reported better-than-expected earnings in recent quarters. This suggests that businesses are able to navigate the current challenges and remain profitable.
  • Improved investor sentiment: Investor sentiment has improved in recent months, as investors become more optimistic about the economic outlook and the prospects for corporate earnings.
  • Increased retail investor participation: Retail investors have been a major force in the stock market in recent years, and their continued participation is helping to support the rally.

The Road Ahead

While the stock market has shown signs of recovery, there are still some risks that investors should be aware of. These include:

  • The possibility of a recession: While the economy is slowing down, there is still a possibility that it could tip into a recession. This would have a negative impact on corporate earnings and stock prices.
  • Geopolitical tensions: The war in Ukraine and other geopolitical tensions are creating uncertainty and could lead to market volatility.
  • Rising interest rates: Even if the Fed slows down its rate-hiking cycle, interest rates are still expected to be higher than they were before the pandemic. This could continue to put pressure on stock prices.

Despite these risks, the overall outlook for the stock market is positive. The easing of inflation, the prospect of no further rate hikes, and the renewed interest in small-cap companies are all positive signs that suggest the market is on a path to recovery. As investors regain confidence and seek out growth opportunities, the stock market is poised to continue its upward trajectory.

From Inflation to Deflation: A Seasonal Shift in Consumer Prices

Posted on by slightbourne@noblecapitalmarkets.com

Consumers tapped out from inflation may finally get a reprieve this holiday season in the form of falling prices. According to Walmart CEO Doug McMillon, deflation could be on the horizon.

On a Thursday earnings call, McMillon said the retail giant expects to see deflationary trends emerge in the coming weeks and months. He pointed to general merchandise and key grocery items like eggs, chicken, and seafood that have already seen notable price decreases.

McMillon added that even stubbornly high prices for pantry staples are expected to start dropping soon. “In the U.S., we may be managing through a period of deflation in the months to come,” he said, welcoming the change as a benefit to financially strapped customers.

His comments echo optimism from other major retailers that inflation may have peaked. Earlier this week, Home Depot CFO Richard McPhail remarked that “the worst of the inflationary environment is behind us.”

Government data also hints the pricing pressures are easing. The consumer price index (CPI) for October was flat compared to September on a seasonally adjusted basis. Core CPI, which excludes volatile food and energy costs, dipped to a two-year low.

This emerging deflationary environment is a reprieve after over a year of runaway inflation that drove the cost of living to 40-year highs. Everything from groceries to household utilities saw dramatic price hikes that squeezed family budgets.

But the October CPI readings suggest the Federal Reserve’s aggressive interest rate hikes are having the desired effect of reining in excessive inflation. As supply chains normalize and consumer demand cools, prices are softening across many categories.

For instance, the American Farm Bureau Federation calculates that the average cost of a classic Thanksgiving dinner for 10 will be $64.05 this year – down 4.5% from 2022’s record high of $67.01. The drop is attributed largely to a decrease in turkey prices.

Still, consumers aren’t out of the woods yet when it comes to stubborn inflation on essentials. While prices are down from their peak, they remain elevated compared to historical norms.

Grocery prices at Walmart are up mid-single digits versus 2022, though up high-teens compared to 2019. Many other household basics like rent, medical care, and vehicle insurance continue to rise at above average rates.

And American shopping habits reflect the impact of lingering inflation. Walmart CFO John David Rainey noted consumers have waited for discounts before purchasing goods such as Black Friday deals.

McMillon indicated shoppers are still monitoring spending carefully. So while deflationary pressure is a tailwind, Walmart doesn’t expect an abrupt return to pre-pandemic spending patterns.

The retailer hopes to see food prices in particular come down faster, as grocery inflation eats up a significant chunk of household budgets. But experts warn it could take the rest of 2023 before inflation fully normalizes.

Consumers have been resilient yet cautious under economic uncertainty. If deflation takes root across the retail landscape, it could provide much-needed relief to wallets and mark a turning point toward recovery. For now, the environment looks favorable for a little more jingle in shoppers’ pockets this holiday season.

US Economy Achieving ‘Soft Landing’ as Inflation Cools Without Recession

Posted on by slightbourne@noblecapitalmarkets.com

Against the odds, the US economy appears poised to stick the landing from a period of scorching inflation without plunging into recession. This smooth descent towards more normal inflation, known as a “soft landing”, has defied most economists’ expectations thus far.

Just months ago, fears of an imminent downturn were widespread. Yet October’s inflation print showed consumer prices rising 3.2% annually – down markedly from a 40-year high of 9.1% in 2022. More importantly, core inflation excluding food and energy eased to 2.8% over the last 5 months – barely above the Federal Reserve’s 2% target.

This disinflation is occurring while job gains continue and economic growth rebounds. Employers added a solid 204,000 jobs per month over the past quarter. GDP growth also accelerated to a robust 4.9% annualized pace in Q3, its fastest since late 2021.

Such resilience has led forecasters like Oxford Economics’ Nancy Vanden Houten to now predict, “What we are expecting now is a soft landing.” Avoiding outright recession while taming inflation would be a major feat. In the past 80 years, the Fed has never managed it without sparking downturns.

Cooling inflation gives the central bank room to moderate its fierce rate hike campaign. Since March, the Fed lifted its benchmark rate range to a restrictive 5.25%-5.50% from near zero to squash rising prices.

Investors are betting these tightening efforts have succeeded, with futures implying rate cuts could come as early as May 2023. Markets rallied strongly after October’s consumer price report.

Risks Remain
However, risks abound on the path to a soft landing. Inflation remains well above the Fed’s goal, consumer spending is softening, and ongoing rate hikes could still bite.

“It looks like a soft landing until there’s some turbulence and things get hairier,” warns Indeed economist Nick Bunker.

While consumers powered the economy earlier in recovery, retail sales just declined for the first time since March. Major retailers like Home Depot and Target reveal shoppers are pulling back. If consumers continue retreating, recession odds could rise again.

The Fed likely needs more definitive proof before declaring victory over inflation. Chairman Jerome Powell still stresses the need for “sufficiently restrictive” rates to hit the 2% target sustainably.

Further shocks like energy price spikes or financial instability could also knock the economy off its delicate balancing act. For now, the coveted soft landing finally looks achievable, but hazards remain if inflation or growth falter.

Navigating the Descent
Amid this precarious environment, how should investors, policymakers and everyday Americans navigate the descent?

For the Fed, it means walking a tightrope between overtightening and loosening prematurely. Moving too fast risks recession, while moving too slowly allows inflation to become re-entrenched. Gradually slowing rate hikes as data improves can guide a gentle landing.

Investors should prepare for further turbulence, holding diversified assets that hedge against inflation or market swings. Seeking prudent VALUE rather than chasing speculative growth is wise at this late stage of recovery.

Consumers may need to budget conservatively, pay down debts, and boost emergency savings funds. With caution, America may yet stick an elusive soft landing during this perilous inflationary journey.

Inflation Pressures Continue to Ease in October

Posted on by slightbourne@noblecapitalmarkets.com

The latest Consumer Price Index (CPI) report released Tuesday morning showed inflation pressures continued to ease in October. Consumer prices were unchanged for the month and rose 3.2% over the last 12 months. This marks a deceleration from September’s 0.4% monthly increase and 3.7% annual inflation rate.

Core inflation, which excludes volatile food and energy costs, also showed signs of moderating. The core CPI rose 0.2% in October, down from 0.3% in September. On an annual basis, core inflation was 4.0% in October, slower than the 4.1% pace in September and the lowest since September 2021.

Falling Energy Prices Hold Down Headline Inflation

Much of the monthly easing in prices was due to falling energy costs. Energy prices dropped 2.5% in October, driven largely by a 5% decline in gas prices during the month. This helped offset increases in other areas and kept headline CPI flat for October. Lower oil and gas prices also contributed to the slowing in annual inflation.

The recent drop in gas prices is welcome news for consumers who saw prices spike earlier this year. According to AAA, the national average for a gallon of regular gasoline has fallen to $3.77 as of Nov. 14, down from a record high of $5.02 in mid-June. If prices continue to trend lower, it would provide further relief on overall inflation.

Shelter Inflation Moderates

The shelter index, which includes rents and homeowner costs, has been a major driver of inflation this year. But there are signs of moderation taking hold. Shelter inflation rose 6.7% over the last year in October, the smallest increase in 12 months. On a monthly basis, shelter costs were up just 0.3% in October versus 0.6% in September.

Rents are a key component of shelter inflation. Growth in rents indexes slowed in October, likely reflecting a cooling housing market. The index for rent of primary residence increased 0.5% for the month, while the owners’ equivalent rent index rose 0.4%.

Used Vehicle Prices Extend Declines

Consumers also got a break on used vehicle prices in October. Prices for used cars and trucks fell 0.8% in October, after a 2.5% decline in September. New vehicle prices dipped 0.1% as auto supply constraints slowly ease.

Used car prices skyrocketed in 2021 and early 2022 amid low inventories. But prices have now fallen 7.5% from the record high set in May 2022, helping reduce inflationary pressures.

Outlook for Fed Policy

Financial markets took the CPI report as another sign the Federal Reserve is getting inflation under control. Markets are now pricing in a near 100% chance the Fed holds rates steady at its December policy meeting. This follows four consecutive 0.75 percentage point hikes between June and November.

Fed Chair Jerome Powell recently indicated the central bank can slow the pace of hikes as inflation moves back toward the 2% target. But he cautioned there is still “some ways to go” in bringing inflation down.

Most economists expect the Fed to continue holding rates in the first half of 2023. But sticky inflation in services may mean rates have to stay elevated for longer before the Fed can contemplate rate cuts. Wage growth and the tight labor market also pose upside risks on inflation.

For consumers, easing inflation provides some financial relief after two difficult years. But prices remain substantially above pre-pandemic levels. Moderating inflation is a positive sign the Fed’s policies are working, but households will likely continue feeling price pressures for some time.

Recession Fears on the Rise as Consumer Sentiment Plunges

Posted on by slightbourne@noblecapitalmarkets.com

Major stock indexes posted modest gains Friday, but new data reflects growing unease among consumers about the state of the U.S. economy.

The University of Michigan’s preliminary November reading on consumer sentiment fell to 60.4, below economist expectations and the lowest level since May. This marked the fourth straight monthly decline for the index, highlighting continued erosion in economic optimism.

“Consumers cited high interest rates and ongoing wars in Gaza and Ukraine as factors weighing on the economic outlook,” said Joanne Hsu, director of Surveys of Consumers.

Inflation expectations also edged up to 3.2% over the next five years, levels not seen since 2011. This suggests the Federal Reserve still has work to do in getting inflation under control after aggressive interest rate hikes this year.

Earlier this week, Fed Chair Jerome Powell reiterated that further rate increases may be necessary to keep inflation on a sustainable downward trajectory. Other Fed officials echoed Powell’s sentiments that policy may need to become even more restrictive to tame inflationary pressures.

For investors, the deteriorating consumer outlook and stubborn inflation signal more churn ahead for markets after October’s volatile swings. While stocks have rebounded from last month’s lows, lingering economic concerns could spur renewed volatility ahead.

This uncertain environment calls for careful navigation by investors. Maintaining discipline and focusing on quality will be key to weathering potential market swings.

With slower growth on the horizon, investors should emphasize companies with strong fundamentals, steady earnings and lower debt levels. Searching for value opportunities and dividend payers can also pay off as markets turn choppy.

Diversification remains critical to mitigate risk. Ensuring portfolios are balanced across asset classes, market caps, sectors and geographies can smooth out volatility when conditions invariably shift. Regular rebalancing to bring allocations back in line with targets is prudent as well.

Staying invested for the long haul is important too. Bailing out of the market can backfire if it recovers and gains are missed. A buy-and-hold approach with a multi-year time horizon allows compounding to work its magic.

Of course, maintaining some dry powder in cash provides flexibility to scoop up bargains if stocks retreat again. Dollar-cost averaging into new positions can limit downside risk.

Above all, patience and discipline will serve investors well in navigating uncertainty. Sticking to a plan and avoiding emotional reactions to market swings can help anchor portfolios for the long run.

While the path ahead may be bumpy, historic market performance shows long-term returns can overcome short-term volatility. Bear markets eventually give way to new bulls. Maintaining perspective and focusing on the horizon can guide investors through uncertain times.

Of course, there are no guarantees in investing. Stocks could see more declines before recovery takes hold. But diversification, quality tilt and balanced allocations can help smooth out the ride.

And investors with long time horizons can actually take advantage of market dips. Regular investing through 401(k)s means buying more shares when prices are depressed, which will pay off handsomely when markets rebound.

The key is tuning out the noise and sticking to smart principles: diversify, rebalance, emphasize quality, maintain perspective and stay the course. This disciplined approach can serve investors well in volatile times.

Though the path forward may remain bumpy, patient investors focused on the long view stand to be rewarded in time.

SEC Chief Gensler’s Concerns Mount Over Leverage in Treasuries Market

Posted on by slightbourne@noblecapitalmarkets.com

Securities regulators have leverage risks in the multi-trillion dollar US Treasuries market back under the microscope. Recent remarks by Securities and Exchange Commission (SEC) Chair Gary Gensler signaled renewed urgency around curtailing destabilizing trading practices in the world’s largest bond market.

In a speech to financial executives, Gensler emphasized the systemic dangers posed by excessive leverage use among institutional government bond traders. He pointed to stresses witnessed during this year’s regional banking turmoil as a reminder of such hazards manifesting and causing wider contagion.

Regulators worry traders combining high leverage with speculative strategies in Treasuries could trigger severe market dysfunction during times of volatility. This could then spill over to wreak havoc in the broader financial system given Treasuries’ status as a global haven asset class.

Gensler advocated for SEC proposals intended to impose tighter control over leverage and trading risks. These include requiring central clearing for Treasuries transactions and designating large proprietary trading institutions as broker-dealers subject to higher regulatory standards.

The SEC chief argues such reforms are vital to counterbalance the threat of destabilizing blowups in a foundational market underpinning global finance.

Among the riskier trading plays under scrutiny is the so-called basis trade where leverage magnifies bets exploiting slight pricing variations between Treasury futures and underlying bonds. While providing liquidity, regulators fret the strategy’s extensive borrowing leaves it vulnerable to violent unwinding in turbulent markets.

Warnings around the basis trade have intensified given concentration of risks among influential bond trading heavyweights. US regulators demand greater visibility into leverage levels across systemically-important markets to be able to detect emerging hazards.

Overseas authorities are also tightening oversight of leveraged strategies. The Bank of England recently floated measures to restrain risk-taking in British government bond markets that could destabilize the financial system.

However, Wall Street defenders argue the basis trade fulfills a valuable role in greasing trading and provides resilience during crises. They point to the strategy weathering last decade’s pandemic-induced mayhem in markets without mishap.

But SEC leadership remains unconvinced current patchwork regulation provides sufficient safeguards against excessive risk-taking. They emphasize the over-the-counter nature of Treasuries trading allows huge leverage buildup outside the purview of watchdogs.

Hence the regulatory push for greater transparency from large leveraged investors to facilitate continuous monitoring for dangers to system stability. Furthermore, shorter settlement timelines being phased in are meant to curb risk accumulation in the opaque Treasury secondary market.

While largely supportive of the abbreviated settlement schedule, Gensler noted challenges still abound on the foreign exchange side that demand close tracking.

Overall, the revived warnings from America’s top securities regulator underscore enduring concerns post-2008 crisis reforms did not fully address leverage-fueled excess in Treasury markets. Keeping a tight leash on potentially destabilizing trading practices remains a clear priority for policymakers focused on securing the financial system against shocks.

Slower Job Growth in October Adds to Evidence of Cooling Labor Market

Posted on by slightbourne@noblecapitalmarkets.com

The October employment report showed a moderation in U.S. job growth, adding to signs that the blazing labor market may be starting to ease. Nonfarm payrolls increased by 150,000 last month, lower than consensus estimates of 180,000 and a slowdown from September’s revised gain of 289,000 jobs.

The unemployment rate ticked up to 3.9% from 3.8% in September, hitting the highest level since January 2022. Wages also rose less than expected, with average hourly earnings climbing just 0.2% month-over-month and 4.1% year-over-year.

October’s report points to a cooling job market after over a year of robust gains that outpaced labor force growth. The slowdown was largely driven by a decline of 35,000 manufacturing jobs stemming from strike activity at major automakers including GM, Ford, and Chrysler.

The United Auto Workers unions reached tentative agreements with the automakers this week, so some job gains are expected to be recouped in November. But broader moderation in hiring aligns with other indicators of slowing momentum. Job openings declined significantly in September, quits rate dipped, and small business hiring plans softened.

For investors, the cooling labor market supports the case for a less aggressive Fed as the central bank aims to tame inflation without triggering a recession. Markets are now pricing in a 90% chance of no rate hike at the December FOMC meeting, compared to an 80% chance prior to the jobs report.

The Chance of a Soft Landing Improves

The decline in wage growth in particular eases some of the Fed’s inflation worries. Slowing wage pressures reduces the risk of a 1970s-style wage-price spiral. This gives the Fed room to pause rate hikes to assess the delayed impact of prior tightening.

Markets cheered the higher likelihood of no December hike, with stocks surging on Friday. The S&P 500 gained 1.4% in morning trading while the tech-heavy Nasdaq jumped 1.7%. Treasury yields declined, with the 10-year falling to 4.09% from 4.15% on Thursday.

Investors have become increasingly optimistic in recent weeks that the Fed can orchestrate a soft landing, avoiding recession while bringing inflation back toward its 2% target. CPI inflation showed signs of moderating in October, declining more than expected to 7.7%.

But risks remain, especially with services inflation still running hot. The Fed’s terminal rate will likely still need to move higher than current levels around 4.5%. Any renewed acceleration in wage growth could also put a December hike back on the table.

Labor Market Resilience Still Evident

While job gains moderated, some details within October’s report demonstrate continued labor market resilience. The unemployment rate remains near 50-year lows at 3.9%, still below pre-pandemic levels. Labor force participation also remains above pre-COVID levels despite a slight tick down in October.

The household survey showed a gain of 328,000 employed persons last month, providing a counterweight to the slower payrolls figure based on the establishment survey.

Job openings still exceeded available workers by over 4 million in September. And weekly jobless claims remain around historically low levels, totaling 217,000 for the week ended October 29.

With demand for workers still outstripping supply, risks of a sharp pullback in hiring seem limited. But the October report supports the case for a period of slower job gains as supply and demand rebalances.

Moderating job growth gives the Fed important breathing room as it assesses progress toward its 2% inflation goal. For investors, it improves the odds that the Fed can achieve a soft landing, avoiding aggressive hikes even as inflation persists at elevated levels.

Stocks Surge as End of Fed Hikes Comes Into View

Posted on by slightbourne@noblecapitalmarkets.com

A buoyant optimism filled Wall Street on Thursday as investors interpreted the Fed’s latest decision to stand pat on rates as a sign the end of the hiking cycle may be near. The Nasdaq leapt 1.5% while the S&P 500 and Dow climbed nearly 1.25% each as traders priced in dwindling odds of additional tightening.

While Fed Chair Jerome Powell stressed future moves would depend on the data, markets increasingly see one more increase at most, not the restrictive 5-5.25% peak projected earlier. The CME FedWatch tool shows only a 20% chance of a December hike, down from 46% before the Fed meeting.

The prospect of peak rates arriving sparked a “risk-on” mindset. Tech stocks which suffered during 2023’s relentless bumps upward powered Thursday’s rally. Apple rose over 3% ahead of its highly anticipated earnings report. The iPhone maker’s results will offer clues into consumer spending and China demand trends.

Treasury yields fell in tandem with rate hike expectations. The 10-year yield dipped under 4.6%, nearing its early October lows. As monetary policy tightening fears ease, bonds become more attractive.

Meanwhile, Thursday’s batch of earnings updates proved a mixed bag. Starbucks and Shopify impressed with better than forecast reports showcasing resilient demand and progress on cost discipline. Shopify even managed to eke out a quarterly profit thanks to AI-driven optimization.

Both stocks gained over 10%, extending gains for October’s worst sectors – consumer discretionary and tech. But biotech Moderna plunged nearly 20% on underwhelming COVID vaccine sales guidance. With demand waning amid relaxed restrictions, Moderna expects revenue weakness to persist.

Still, markets found enough earnings bright spots to sustain optimism around what many now view as the Fed’s endgame. Bets on peak rates mark a momentous shift from earlier gloom over soaring inflation and relentless hiking.

Savoring the End of Hiking Anxiety

Just six weeks ago, recession alarm bells were clanging loudly. The S&P 500 seemed destined to retest its June lows after a brief summer rally crumbled. The Nasdaq lagged badly as the Fed’s hawkish resolve dashed hopes of a policy pivot.

But September’s surprisingly low inflation reading marked a turning point in sentiment. Rate hike fears moderated and stocks found firmer footing. Even with some residual CPI and jobs gains worrying hawkish Fed members, investors are increasingly looking past isolated data points.

Thursday’s rally revealed a market eager to rotate toward the next major focus: peak rates. With the terminal level now potentially in view, attention turns to the timing and magnitude of rate cuts once inflation falls further.

Markets are ready to move on from monetary policy uncertainty and regain the upside mentality that supported stocks for so long. The Nasdaq’s outperformance shows traders positioning for a soft landing rather than bracing for recession impact.

Challenges Remain, but a Peak Brings Relief

Reaching peak rates won’t instantly cure all market ills, however. Geopolitical turmoil, supply chain snarls, and the strong dollar all linger as headwinds. Corporate earnings face pressure from margins strained by high costs and waning demand.

And valuations may reset lower in sectors like tech that got ahead of themselves when easy money flowed freely. But putting an endpoint on the rate rollercoaster will remove the largest overhang on sentiment and allow fundamentals to reassert influence.

With peak rates cementing a dovish pivot ahead, optimism can return. The bear may not yet retreat fully into hibernation, but its claws will dull. As long as the economic foundation holds, stocks have room to rebuild confidence now that the end is in sight.

Of course, the Fed could always surprise hawkishly if inflation persists. But Thursday showed a market ready to look ahead with hopes the firehose of rate hikes shutting off will allow a modest new bull run to take shape in 2024.

Fed Holds Rates at New 22-Year High, Hints More Hikes Possible

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve announced its widely expected decision on Wednesday to maintain interest rates at a new 22-year high after an aggressive series of hikes intended to cool inflation. The Fed kept its benchmark rate in a range of 5.25-5.50%, indicating it remains committed to tamping down price increases through restrictive monetary policy.

In its statement, the Fed upgraded its assessment of economic activity to “strong” in the third quarter, a notable shift from “solid” in September. The upgrade likely reflects the blockbuster 4.9% annualized GDP growth in Q3, driven by resilient consumer spending.

However, the Fed made clear further rate hikes could still occur if economic conditions warrant. The central bank is treading cautiously given uncertainty around how past tightening will impact growth and jobs.

For consumers, the Fed’s hiking campaign this year has significantly increased the cost of borrowing for homes, cars, and credit cards. Mortgage rates have essentially doubled from a year ago, deterring many would-be home buyers and slowing the housing market. Auto loan rates are up roughly 3 percentage points in 2023, increasing monthly payments. The average credit card interest rate now sits around 19%, the highest since 1996.

Savers are finally benefitting from higher yield on savings accounts, CDs, and Treasury bonds after years of paltry returns. But overall, households are facing greater financial strain from pricier loans that could eventually crimp spending and economic momentum if rates stay elevated.

“The Fed is deliberately slowing demand to get inflation in check, and that painful process is underway,” noted Bankrate chief financial analyst Greg McBride. “For consumers, the impact is being felt most acutely in the higher costs of homes, autos, and credit card debt.”

Investors have also felt the brunt of aggressive Fed tightening through increased market volatility and falling valuations. The S&P 500 has sunk over 20% from January’s record high, meeting the technical definition of a bear market. Rising Treasury yields have put pressure on stocks, especially higher growth technology names.

Still, stocks rebounded in October based on hopes that easing inflation could allow the Fed to slow or pause rate increases soon. Markets are betting rates could start declining in 2024 if inflation continues trending down. But that remains uncertain.

“The Fed is data dependent, so until they see clear evidence that inflation is on a sustainable downward trajectory, they have to keep tightening,” said Chris Taylor, portfolio manager at Morgan Stanley. “Markets are cheering lower inflation readings, but the Fed can’t declare victory yet.”

In his post-meeting press conference, Fed Chair Jerome Powell emphasized that officials have “some ways to go” before stopping rate hikes. Powell indicated the Fed plans to hold rates at a restrictive level for some time to ensure inflation is contained.

With consumer and business spending still relatively healthy, the Fed currently believes the economy can withstand additional tightening for now. But Powell acknowledged a downturn is possible as the delayed impacts of higher rates materialize.

For investors, the path ahead likely entails continued volatility until more predictable Fed policy emerges. But markets appear reassured by the central bank’s data-dependent approach. As inflation slowly declines, hopes are growing that the end of the Fed’s aggressive hiking cycle may come into focus sometime in 2024, potentially setting the stage for an economic and market rebound.

Choppy Waters: S&P 500 Faces Longest Slump Since the 2020 Crash

Posted on by slightbourne@noblecapitalmarkets.com

The S&P 500 is staring down a dubious milestone – its first 3-month losing streak since the COVID-19 pandemic upended markets back in early 2020.

Barring a dramatic turnaround this week, the index will log declines in August, September and October. That hasn’t happened since a brutal 5-month free fall ended in March 2020.

The benchmark index has sunk over 10% from peaks hit in late July. After four straight down weeks, the S&P 500 dipped into correction territory last Friday.

That marks a ten percent drop from all-time highs reached just three months ago in July. However, the index remains up around 8% year-to-date.

The S&P 500, and What It Represents

For context, the S&P 500 represents the broader U.S. stock market across major sectors of the economy. It tracks the stocks of 500 large American companies selected by a committee at S&P Dow Jones Indices.

The index covers around 80% of available market capitalization. Exposure spans mega-cap technology leaders like Apple, Microsoft and Amazon to energy giants like Exxon and Chevron.

The S&P 500 functions as a barometer for the country’s economic health. The performance and reactions within the index drive news cycles and often dictate investor sentiment.

Trillions in assets are benchmarked to the S&P 500. That includes huge passive funds like those offered by Vanguard and BlackRock’s iShares. The index is also a favorite benchmark for active managers trying to beat the market.

Given its stature and ubiquity, sustained declines in the S&P 500 raise investor fears and make headlines. Its ongoing slide has been driven largely by surging inflation, rising interest rates, and recession worries.

History of Late-Year Rebounds

While unpleasant, the S&P 500’s current slump isn’t out of the ordinary from a historical perspective. The index has averaged a 14% peak-to-trough decline in intra-year pullbacks since 1950 according to data from Carson Group’s Ryan Detrick.

And when the index falters during the late summer and early fall months, strong year-end rebounds have usually followed.

In the 5 prior years where August, September and October saw declines, the S&P 500 rose 4.5% on average over November and December. The lone exception was 1957 when it managed a slight loss.

So despite growing skittishness on Wall Street, historical trends bode decently for markets to close 2023 on a high note.

Drivers of the Current Decline

Like most substantial sell-offs, fears of slowing economic growth and a hawkish Federal Reserve have driven the current slide.

Surging inflation led the Fed to rapidly raise interest rates in order to cool down demand. Higher rates pressure different areas of the market like long-duration tech stocks.

Meanwhile, recession odds have climbed as housing and manufacturing data weakened. The strong U.S. dollar has also impacted multinational corporate earnings.

Geopolitical turmoil surrounding Russia’s war in Ukraine coupled with US-China tensions exacerbated volatility. It amounted to a deteriorating backdrop that sent the S&P 500 downhill fast.

Now with consumer prices potentially peaking, Fed rate hikes slowing, and earnings holding up, optimism is regrowing. Valuations also look more attractive after the steep pullback.

Many strategists see the negativity as overdone and expect a rally into year-end. However, tests likely remain until concrete evidence of an inflation or economic slowdown emerge.

S&P 500 Outlook and Implications

While disconcerting on the surface, the S&P 500’s bout of weakness isn’t unprecedented. The question is whether it represents a normal correction or the start of a bear market.

Broadly, analysts think major indices will close out 2023 with mid-single digit gains. But forecasts vary widely from low single digits to returns over 10% above current levels.

If historic trends repeat, odds favor a recovery once the calendar flips to November. Although with midterm elections ahead, politics could play an outsized role in market swings.

Regardless, the S&P 500 ending its 3-month rut would be welcomed by investors. Sustained declines often signal greater worries about the economy and corporate profits.

Given the importance of consumer and business confidence, ending 2023 on an upswing would bode well for preventing a deeper downturn. But the Fed’s moves to squash inflation will remain an overhang into 2024.

Jamie Dimon Unloads $141 Million in JPMorgan Stock in First Ever Stock Sale

Posted on by slightbourne@noblecapitalmarkets.com

JPMorgan Chase CEO Jamie Dimon is cashing out for the first time in his 17 years leading the banking giant. Dimon and his family are planning to unload $141 million worth of JPMorgan stock starting next year. The sale of one million shares marks the first time Dimon has trimmed his stake since taking the helm in 2006.

While surprising, the stock sale doesn’t represent a loss of faith by Dimon in JPMorgan’s future. According to a securities filing, Dimon “continues to believe the company’s prospects are very strong.” Even after shedding $141 million in stock, Dimon will still own around 7.6 million shares in the bank, worth over $1 billion at current prices.

Dimon timed the sale to take advantage of a rebound in JPMorgan’s stock, which is up 5% year-to-date despite headwinds facing the banking sector. With the Fed boosting interest rates aggressively to combat inflation, demand for loans has slowed. Banks are also earning less on their bond holdings as rates rise.

Yet JPMorgan has managed to deliver solid earnings this year, with profit jumping 35% last quarter. The acquisition of assets from failed West Coast lender First Republic enhanced results. Dimon has praised JPMorgan’s “fortress balance sheet” that has it positioned to weather economic storms.

While JPMorgan has excelled recently, Dimon has sounded the alarm on gathering risks. He warned the Fed’s inflation fight may tip the remarkably resilient U.S. economy into recession. Geopolitical tensions around the world are also a rising threat. “Now may be the most dangerous time the world has seen in decades,” Dimon said earlier this month.

With risks rising, Dimon seems to be taking money off the table while JPMorgan’s stock still hovers near 52-week highs. The sale allows him to lock in returns after a tremendous 17-year run as CEO. Since taking the helm, Dimon has led JPMorgan to become the nation’s most profitable bank, raking in $48 billion last year alone.

Yet even after the stock sale, Dimon maintains immense exposure to JPMorgan’s fortunes. His remaining 7.6 million shares give him a built-in incentive to keep delivering results and driving the stock higher. While handing some risk off to the market, Dimon remains invested in JPMorgan’s success.

Dimon’s high-profile stock sale could potentially have ripple effects across the stock market. Some may view the move as Dimon lacking confidence in the markets and economy, sparking wider selling. JPMorgan’s share price often acts as a bellwether for overall market sentiment. If investors interpret Dimon’s sale as a warning sign, it could drag down indices and lead to a pullback in stocks. However, most analysts believe the sale is simply prudent financial planning by Dimon rather than a market call. With risks rising, Dimon is wisely diversifying his holdings after a long run-up in JPMorgan’s shares. Therefore, while the sale makes waves in the news, it likely won’t dramatically sway broader market direction. But in jittery times, even a whiff of pessimism from an influential CEO like Dimon can impact overall investor psychology.

Some view the stock sale as a shot across the bow at the Federal Reserve. Dimon may be signaling that excessive rate hikes could stifle the economy and hurt the banking sector. By cashing out now, Dimon is suggesting trouble may lie ahead.

Nonetheless, JPMorgan insists Dimon has confidence in the bank’s “very strong” prospects. The stock sale appears to be prudent risk management rather than a warning. As a savvy leader, Dimon knows the value of diversification.

With markets on edge, Dimon’s stock sale provides a dose of foreboding. Yet JPMorgan remains well-positioned to weather any storm. As long as Dimon is at the helm, don’t expect one stock sale to derail JPMorgan’s trajectory anytime soon.