- Chairman Powell left little doubt that he is prepared to push rates higher as needed to stamp out inflation. Some economists feel this is nearing an end with the language he used yesterday. During the meeting, he said, "Incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected." It is premature to think about pausing; however, I suspect we will see language discussing a possible "slowdown" in December based on the data provided. We should see 75bps in December as well; the street is betting on this, which is why you saw the equity market trade down so drastically yesterday while MUNIs held their ground.
- Powell's challenge was to signal a shift to a slower pace of hikes without communicating the FED was close to being done with the tightening campaign. He accomplished this by declaring rates would peak higher than officials expected in September. His remarks on 11/2 shifted the focus away from the size of the next rate hike to where they will peak and how long they will have to stay at those levels. MUNIs have gotten super cheap; I suspect we will remain here for some time.
- US manufacturing neared stagflation in October as orders contracted for the fourth time in 5 months while an index of prices paid fell to more than a two-year low. This gauge of factory output retreated to a low dating back to May 2020.
- According to Morgan Stanley, some feel the end of the FED's campaign to raise rates is approaching. They predict that the "bear market" in bonds will quickly correct itself and reverse in 2023. Indicators show the inversion of the yield curve between the 10- and 3-month T bills is a perfect record showing there will be a recession.
- 31 US states adopted tax cuts in some form during the 2022 legislative sessions; this could hurt them over time. Fitch indicated last week that some states with "expansion tax reduction packages" could face budgetary pressures. S&P has not stated any of the sorts; however, I suspect we will see some budget constraints if we move into a recession. With this said, as we all know, states are "flush" with cash and will continue to retain strong credit ratings on most of the items we trade.
- As we have discussed, mortgage numbers have continued to fall over the last month. Sales of new US homes fell in September, resuming a downtrend as decades-high mortgage rates push would-be buyers out of the market. Buyers of new single-family homes decreased by 10.90% to 603K. This decline will contribute to a lower CPI as we move into November.
- A positive 3Q print for real GDP after two straight Q declines to start the year may help stem the market chatter that the US is in a recession; however, many believe we are. Still, the headline will conceal many vulnerabilities IMO below the surface, with one of the biggest would be a plunge in imports. Should this happen, I suspect you will see FED Speak, which will address this, and CPI numbers will eventually come down due to less demand for products.
- Inflation and rate hikes are starting to take a toll on the consumer. A plunge in imports means the trade will significantly boost top-line growth, real imports have fallen for the last two months, and I expect this trend to continue. Signs of softening consumer demand are starting to happen, and I think (along with many) the FED will address this in the next FOMC meeting.
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