There was a shift in the winds of monetary policy.
Last week, it became clear the Federal Reserve (Fed) had softened its hawkish stance. The minutes of the central bank’s November policy meeting indicated the Fed was likely to slow the pace of rate hikes soon. There was a caveat, though. The minutes noted:
“…with inflation showing little sign thus far of abating, and with supply and demand imbalances in the economy persisting…the ultimate level of the federal funds rate that would be necessary to achieve the Committee’s goals was somewhat higher than [Fed officials] had previously expected.”
In other words, rate hikes are likely to be smaller in the future, but the federal funds rate will probably move higher than previously expected. Last week, the CME FedWatch Tool suggested that the federal funds target range will:
Weaker economic data seemed to support the Fed’s pivot. Molly Smith of Bloomberg reported, “Fresh evidence Wednesday pointed to a slowing U.S. economy and a cooling labor market that suggests steep interest-rate hikes by the Federal Reserve are starting to have a broader impact. Business activity contracted for a fifth month in November and applications for unemployment benefits rose last week to a three-month high. While consumer sentiment and new-home sales improved, both remain depressed and indicate a weaker spending appetite and subdued housing demand.”
Investors celebrated the Fed’s stance adjustment, and major U.S. stock indices pushed higher last week. Yields on U.S. Treasuries with maturities of one year or less moved higher last week, while yields on longer maturities moved lower.
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Thanksgiving and football go together like turkey and stuffing.
For some families, though, this year may be more like a turducken, stuffed with American football and the sport the rest of the world knows as football (soccer). The men’s World Cup, which is played every four years for national glory, the Jules Rimet trophy, and millions of dollars in prize money, began on Sunday and will end on December 18.
During the tournament, researchers may track the influence of sentiment on markets. According to Mark Hulbert of MarketWatch, previous research has found that a team’s performance – especially a loss – can have a short but powerful effect on the national mood.
“You would be excused for being skeptical that a soccer tournament has anything to do with the stock market. But you need to understand how disheartened a country’s investors can become after their team loses in the World Cup. A significant body of academic research has found that their dejection has a pronounced impact on the stock market,” reported Hulbert. “…our moods play a powerful role on our investment decisions. We tell ourselves that we base our portfolio decisions solely on sober and rational analysis. As the academic research into the World Cup Effect reminds us, this isn’t always so.”
Investors in the United States were a bit dejected last week. Stronger-than-expected retail sales in October indicated consumer demand remained strong, despite the Federal Reserve’s efforts to slow spending by raising rates. Hawkish commentary from multiple members of the Federal Reserve also affected markets as it suggested the Fed is not ready to pause its inflation fight any time soon, reported Ben Levisohn of Barron’s.
Last week, major U.S. stock indices moved lower, and yields on shorter-term Treasuries moved higher. The yield on a 2-month Treasury bill finished the week at 4.2 percent, while the yield on the benchmark 10-year Treasury ended the week at 3.8 percent.
Last week was remarkable for many reasons.
One reason is that sky watchers around the world had an opportunity to see a total lunar eclipse. The moon, Earth and sun aligned, causing the moon to appear crimson. We won’t see another total lunar eclipse for three years, reported Denise Chow of NBC News.
Another reason, and one that’s far more important to consumers and investors, is that data suggested inflation may be waning. The Consumer Price Index, which is a measure of inflation, was released last week. It showed that prices rose more slowly than expected in October. On an annual basis:
Investors were enthusiastic, hoping the Federal Reserve (Fed) might begin to take a more measured approach to monetary policy tightening. Fed officials were probably happy, too, although inflation remains well above their two percent target. “Central bank officials have emphasized they will need to see several months of deceleration in price gains before they will be convinced they have made progress in their fight against inflation,” reported Megan Cassella of Barron’s.
The inflation news may lift consumers’ spirits, too. Last week, the University of Michigan Consumer Sentiment Survey reported that sentiment dropped sharply in October, erasing about half of recent gains. “Instability in sentiment is likely to continue, a reflection of uncertainty over both global factors and the eventual outcomes of the election,” reported Surveys of Consumers Director Joanne W. Hsu.
Last week, the Standard & Poor’s 500 Index finished the week up 5.9 percent, the Dow Jones Industrial Average gained 4.1 percent, and the Nasdaq Composite rose 8.1 percent, reported Avi Salzman of Barron’s. Treasury yields declined although the yield curve remained inverted
It’s the lag time.
To no one’s surprise, the Federal Reserve continued to battle inflation last week, raising the federal funds rate for the fourth time this year, reported Claire Ballentine of Bloomberg. The Fed is making borrowing more expensive to dampen demand for goods, which should lower inflation – but it’s not a quick fix.
Rate hikes are kind of like winter planting. In cold weather areas, people sometimes spread grass seed in November with the expectation that it will germinate the next spring. It’s similar for rate hikes. The Fed lifts rates with the expectation that the increases will work their way through the economy over the next 12 to 18 months and bring inflation down, reported Matt Levin of MarketPlace.
That lag time can make it difficult for the Fed to know when it has done enough.
Over the last eight months, the Fed’s benchmark rate has increased from near zero to 3.75 percent, reported Nicholas Jasinski of Barron’s. Over that period, inflation, as measured by the Personal Consumption Expenditures (PCE) Price Index, has moved slightly lower. In March, the headline PCE Price Index was 6.6 percent, year-over-year. In September, it was 6.2 percent. The core PCE Price Index, which excludes food and energy prices, was 5.2 percent in March, year-over-year, and 5.1 percent in September.
Last week’s unemployment report showed the economy remains strong, but there were signs that Fed rate hikes are beginning to have an effect. The rate of new jobs growth slowed even as U.S. businesses reported stronger-than-expected hiring increases, reported Jeff Cox of CNBC. Jobs gains were spread across industries, and average hourly earnings increased. In addition, the number of layoffs rose, although the number remained at historically low levels, according to Augusta Saraiva and Reade Pickert of Bloomberg.
Last week, major U.S. stock indices finished lower. Treasury yields rose across all maturities as investors priced in the expectation that the Fed will keep raising rates into 2023.