Tag: Economy

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.

Congress Averts Government Shutdown, But Fight Over Debt Limit Looms

Posted on by slightbourne@noblecapitalmarkets.com

With a government shutdown set to hit at the end of this week if new funding legislation wasn’t passed, Congress has acted swiftly to approve a short-term spending bill. The so-called “continuing resolution” will keep federal agencies open and running until January 19 for some programs and February 2 for others.

The bill easily cleared the Democratic-controlled House on Tuesday with bipartisan support. This followed the backing of Republican House Speaker Mike Johnson, who had proposed the novel “laddered” approach to stagger program expiration dates. The bill now heads to the Senate, where both Majority Leader Chuck Schumer and Minority Leader Mitch McConnell have voiced support. With President Biden also signaling he will sign it, a shutdown appears to have been averted.

For investors, the passage of this stopgap bill means reduced short-term economic uncertainty. A shutdown would have disrupted many key government services as hundreds of thousands of federal workers are furloughed. This can dampen consumer and business sentiment. While the stock market has mostly shaken off prior shutdowns, an extended one could still eventually take a toll.

Yet longer-term risks remain on the horizon, especially regarding the fast-approaching debt ceiling. Come June, the government will hit its statutory borrowing limit, which could set up an intense fiscal battle. If the ceiling isn’t raised or suspended in time, the U.S. could default on its debt for the first time ever. Such an unprecedented event would surely roil markets.

With Speaker Johnson facing pressure from the right flank of his Republican caucus to extract steep spending cuts and other concessions in exchange for lifting the borrowing cap, the stage is set for a high-stakes showdown. Democrats have adamantly opposed using the debt limit as a bargaining chip.

For now, investors may breathe a small sigh of relief. But the reprieve could be short-lived. Once the government funding issue is settled, focus will shift to addressing the debt ceiling well before the June deadline. Otherwise, a far more damaging crisis than a temporary shutdown could be on tap, potentially threatening the full faith and credit of the United States along with the stability of financial markets.

Beyond the recurring fiscal battles, investors will continue monitoring the overall health of the U.S. economy amid rising interest rates and stubborn inflation. Though job growth and consumer spending have been bright spots, risks of recession still loom. Stock market volatility reflects these crosscurrents. For long-term investors, diversification and temperance remain key as policy uncertainty persists.

Looking ahead, the specter of a government default looms large. The debt ceiling debate is a critical juncture that could have widespread implications not just for the financial markets but for the broader economy. The potential fallout from a failure to raise the debt ceiling includes disruptions in government payments, increased borrowing costs, and a loss of confidence in the U.S. financial system.

The debt ceiling has been a recurrent point of contention in recent years, with temporary agreements often reached to avert a crisis. However, the underlying issues of fiscal responsibility, spending priorities, and partisan gridlock persist. The consequences of a protracted deadlock on the debt ceiling could be severe, with ripple effects felt globally.

In the midst of these challenges, investors must navigate an environment marked by uncertainty. While the short-term resolution of the government funding issue provides a momentary sense of stability, the underlying risks and complexities of fiscal policy remain. As the nation grapples with these fiscal challenges, market participants should remain vigilant and adapt their strategies to navigate potential shifts in the economic landscape.

In conclusion, the recent passage of the short-term spending bill averted an immediate government shutdown, providing a respite for investors. However, the focus now turns to the looming debt ceiling debate, introducing a new set of challenges and uncertainties. As events unfold, market participants will need to carefully assess the evolving situation and make informed decisions to mitigate risks in an ever-changing economic and political landscape.

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.

Powell Hints at Potential for More Rate Hikes

Posted on by slightbourne@noblecapitalmarkets.com

Federal Reserve Chair Jerome Powell doused investor hopes of a near-term pause in interest rate hikes, stating “we are not confident that we have achieved such a stance” that would allow inflation to drift down towards the Fed’s 2% target.

In remarks at an International Monetary Fund event, Powell said bringing inflation sustainably down to 2% still has “a long way to go”. His tone cast serious doubt on market expectations that the Fed is almost done raising rates in this cycle.

Traders have priced in a greater than 90% chance of just a 25 basis point December hike, followed by rate cuts commencing in mid-2023. But Powell stressed the Fed stands ready to tighten policy further if economic conditions warrant.

Powell acknowledged recent positive developments, including moderating inflation readings, strong GDP growth, and improvements in supply chains. However, he noted it is unclear how much more progress supply-side factors can drive.

That puts the onus on the Fed to ensure slowing demand prevents inflation from reaccelerating. Powell made clear the Fed will stay the course, even if that means defying market hopes for a dovish pivot.

How High Could Rates Go?

Markets are currently priced for Fed Funds to peak under 5% after a quarter point December increase. But Powell’s insistence on not letting up prematurely raises the specter of a higher terminal rate.

If strong economic reports continue showing robust consumer spending and tight labor markets, the Fed may opt for 50 basis points in December. That would leave rates squarely in the 5-5.25% range, with more hikes possible in early 2023 if inflation persists.

Powell was adamant the Fed cannot be swayed by a few months of data, given the fickle nature of inflation. Premature rate cuts could allow inflation to become re-entrenched, requiring even more aggressive hikes down the road.

With Powell determined to avoid that scenario, investors may need to brace for interest rates cresting above current expectations before the Fed finally stops tightening.

Growth and Jobs Still Too Hot?

Behind Powell’s hawkish messaging is a still-hot economy that could be fueling inflation pressures beneath the surface. The U.S. unemployment rate remains near 50-year lows at 3.7%, with job openings still far exceeding available workers.

Meanwhile, GDP growth rebounded to a strong 2.6% rate in the third quarter, defying recession predictions. Consumer spending has remained remarkably resilient as well.

Powell recognizes the Fed may need to cool economic activity more meaningfully to align demand with constrained supply. That explains his lack of confidence on inflation without further rate increases.

Markets move lower after Powell cools pivot hopes

Stock indexes immediately turned lower following Powell’s remarks, with the Dow shedding around 200 points. Treasury yields also spiked as expectations for longer-term Fed hikes intensified.

Powell succeeded in resetting market assumptions, making clear the Fed has no intentions of reversing course anytime soon just because inflation has shown initial signs of improvement.

Until policymakers have high confidence lasting 2% inflation is in sight, Powell indicated the Fed’s tightening campaign will continue. That may disappoint stock and bond investors banking on rate cuts next year, but fighting inflation remains Powell’s top priority.

With the Fed Chair throwing cold water on pivot hopes, markets will likely undergo a reassessment of just how high the Fed may yet raise rates. Powell’s tone hints investors should brace for more tightening ahead, even if that delays the desired easing cycle.

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.

10-Year Treasury Yield Surpasses 5%: Implications for Markets, Investors, and Beyond

Posted on by cpatches

The yield on the 10-year Treasury note has once again crossed the 5% threshold. This benchmark yield has far-reaching implications for both the financial markets and the general public, serving as a barometer of economic conditions and influencing investment decisions, interest rates, and the cost of borrowing for governments, businesses, and individuals.

Source: U.S. Department of the Treasury
Data as of Oct. 20, 2023

Why Does the 10-Year Treasury Yield Matter?

The 10-year Treasury yield is a crucial indicator of the economy’s health and the state of the financial markets. It reflects the interest rate that the U.S. government pays on its debt with a 10-year maturity, which is considered a relatively safe investment. As such, it provides a reference point for other interest rates in the financial system.

Impact on Investors:

  • Fixed-Income Investments: The 10-year Treasury yield directly impacts the pricing and performance of bonds and other fixed-income investments. When the yield rises, the value of existing bonds tends to decrease, which can lead to capital losses for bondholders.
  • Stock Market: Higher Treasury yields can put pressure on stock prices. As bond yields increase, investors may shift from equities to bonds in search of better returns with lower risk. This shift can lead to stock market volatility and corrections.
  • Cost of Capital: Rising Treasury yields can increase the cost of capital for businesses. This may result in higher borrowing costs for companies, which can impact their profitability and, subsequently, their stock prices.

Impact on the General Public:

  • Mortgage Rates: Mortgage rates are closely tied to the 10-year Treasury yield. When yields rise, mortgage rates tend to follow suit. As a result, homebuyers may face higher borrowing costs, potentially limiting their ability to purchase homes or leading to higher monthly payments for existing homeowners with adjustable-rate mortgages.
  • Consumer Loans: The yield on the 10-year Treasury note also influences interest rates for various consumer loans, including auto loans and personal loans. When yields rise, the cost of borrowing for individuals increases, affecting their spending capacity.
  • Inflation Expectations: An increase in the 10-year Treasury yield can signal rising inflation expectations. In response, consumers may anticipate higher prices for goods and services, which can impact their spending and savings decisions.
  • Retirement and Savings: For retirees and savers, rising Treasury yields can be a mixed bag. While it can translate into higher returns on savings accounts and CDs, it can also result in increased volatility in investment portfolios, which may be a concern for those relying on their investments for income.

Market Sentiment and Economic Outlook:

A sustained rise in the 10-year Treasury yield is often seen as an indication of a strengthening economy. However, if the yield surges too quickly, it can raise concerns about the pace of economic growth and the potential for the Federal Reserve to implement tighter monetary policy to combat inflation.

In conclusion, the 10-year Treasury yield is not just a number on a financial ticker; it’s a critical metric that touches the lives of investors, borrowers, and everyday consumers. Its movements provide valuable insights into the state of the economy and financial markets, making it a figure closely watched by experts and the public alike.

Inflation Battle Goes On: Powell’s Reassuring Message from the Fed

Posted on by slightbourne@noblecapitalmarkets.com

Federal Reserve Chair Jerome Powell reiterated the central bank’s determination to bring down inflation in a speech today, even as he acknowledged potential economic risks from sustained high interest rates. His remarks underline the Fed’s unwavering focus on price stability despite emerging signs of an economic slowdown.

While noting welcome data showing inflation may be starting to cool, Powell stressed it was too early to determine a downward trend. He stated forcefully that inflation remains “too high”, requiring ongoing policy resolve from the Fed to return it to the 2% target.

Powell hinted the path to lower inflation likely entails a period of below-trend economic growth and softening labor market conditions. With jobless claims recently hitting a three-month low, the robust job market could exert persistent upward pressure on prices. Powell indicated weaker growth may be necessary to rebalance supply and demand and quell wage-driven inflation.

His remarks mirror other Fed officials who have suggested a growth sacrifice may be required to decisively curb inflation. The comments reflect Powell’s primary focus on price stability amid the worst outbreak of inflation in over 40 years. He admitted the path to lower inflation will likely prove bumpy and take time.

Powell stated the Fed will base policy moves on incoming data, risks, and the evolving outlook. But he stressed officials are united in their commitment to the inflation mandate. Additional evidence of strong economic growth or persistent labor market tightness could necessitate further rate hikes.

Markets widely expect the Fed to pause rate increases for now, after aggressively raising the federal funds rate this year from near zero to a current target range of 3.75%-4%. But Powell avoided any definitive signal on the future policy path. His remarks leave the door open to additional tightening if high inflation persists.

The speech underscores the Fed’s data-dependent approach while maintaining flexibility in either direction. Powell emphasized officials will proceed carefully in evaluating when to halt rate hikes and eventually ease monetary policy. The Fed faces heightened risks now of overtightening into a potential recession or undertightening if inflation remains stubbornly high.

After being accused of misreading rapidly rising inflation last year, Powell stressed the importance of policy consistency and avoiding premature pivots. A sustainable return to the 2% goal will require ongoing tight monetary policy for some time, even as economic headwinds strengthen.

Still, Powell acknowledged the uncertainties in the outlook given myriad economic crosscurrents. While rate hikes will continue slowing growth, easing supply chain strains and improving global trade could help counter those drags next year. And robust household savings could cushion consumer spending despite higher rates.

But Powell made clear the Fed will not declare victory prematurely given the persistence of inflation. Officials remain firmly committed to policy firming until convincing evidence demonstrates inflation moving down sustainably toward the target. Only then can the Fed safely conclude its aggressive tightening cycle.

For investors, Powell’s speech signals monetary policy will likely remain restrictive for some time, though the ultimate peak in rates remains uncertain. Markets should prepare for extended volatility as the Fed responds to evolving economic data. With risks tilted toward policy tightness, interest-sensitive assets could face ongoing pressure.