Sightline Weekly Market Update: What Fed Presidents Are Telling Us
After a parade of Fed regional president’s speeches and interviews, North American equity markets gave back a little of the previous week’s gains while European equities rose. Value style supported by consumer staples led growth. Oil suffered one of the worst weeks of the year, falling almost 10% in the week, in part on news that European oil and gas storage tanks were full ahead of the winter season.
On Monday, the Federal Reserve Bank of New York’s survey of consumer expectations reported consumer inflation expectations for all three periods (one year, three years, and five years) rose. The one-year expectation increased to 5.94%, up from 5.44% in September, the three years increased to 3.1% from 2.9%, and the five years expectation increased marginally by 0.2 percentage points to 2.4%. Nearly 43% of participants in the New York Fed’s October survey expected the unemployment rate would be higher in one year.1
On Tuesday, in a sign that inflation could be slowing, the Producer Price index for final demand increased by 0.2% in October, bringing the unadjusted basis of the index for final demand for 12 months ending October to 8.0%. Demand for services fell 0.1% while demand for final goods rose 0.6%.2 On the same day, the New York Federal Reserve’s Empire State Headline Business Conditions index, a gauge of business activity in the state, rose 14 points to 4.5 in November. Inventories grew significantly, labor market indicators pointed to increases in employment and hours worked, while delivery times were little changed, and new orders fell slightly.3
In an indication that the consumer is feeling the pressure of inflation, the Federal Reserve Bank of New York reported on Wednesday that consumer credit balances showed a year-over-year increase of 15% ($38 billion), the most significant increase in more than 20 years. Mortgage balances rose by $282 billion in the third quarter to $11.6 trillion, $1 trillion higher than one year ago. Auto loans also increased by $22 billion. In total, household debt increased in the third quarter by $351 billion or 2.2% and is $2.36 trillion higher than at the end of 2019.4
On Wednesday, the U.S. Census Bureau announced that retail sales increased by 1.3% in October versus a survey of economists by the Wall Street Journal expecting an increase of 1.2%. Ex-gasoline sales and sales of auto receipts, retails sales were up 0.9%. We expect that a.5 Some of the increase is attributed to inflation but not enough to slow consumer spending. Also, on Wednesday, the Federal Reserve reported industrial production decreased in October by 0.1%, and the gain in September was revised down to 0.1%. Manufacturing output moved up 0.1%, mining moved lower by 0.4%, and utilities dropped by 1.5%. Capacity utilization decreased by 0.2 percentage points in October to 79.9%.6
On Thursday, the initial claims remained in the range of recent months, falling 4,000 to 222,000. Continuing claims for all benefit programs for the period ending October 29 increased to 1,287,399, an increase over the previous week of 24,305.7 Housing starts fell 4.2%, as did the number of building permits, falling 2.4% for the month of October in reaction to higher interest rates.8
On Friday, the Conference Board reported the LEI (Leading Economic Index) fell 0.8% in October. The LEI is comprised of ten weighted indicators designed to track the peaks and valleys of the business cycle. The LEI fell for eight consecutive months, reflecting consumers deteriorating outlook caused by inflation and rising interest rates. The diffusion index continues to indicate a high possibility of a recession in the coming months.9
During the past week, several Fed regional presidents gave interviews discussing the FOMC members thinking and possible pace of future rates and the timing of the pivot to lower policy rates. The St. Louis Fed President, James Bullard, wobbled the markets on Thursday when he said that “the policy rate is not yet in the zone that may be considered sufficiently restrictive.” Bullard said the Taylor Rule for monetary policy suggests rates could be in the 5% to 7% range, which is higher than currently priced in the markets and higher than Fed forecasts.10 What seems to be inevitable under the current framework is the Fed members are telling us rates must go higher to satisfy the Fed’s price stability and inflation goals. If the economic activity can remain resilient, there is a slight possibility the coming recession may not be as severe as initially thought.
10 https://www.cnbc.com/2022/11/17/feds-bullard-says-rate-hikes-have-had-only-limited-effects-on-inflation-so-far.html; https://www.stlouisfed.org/-/media/project/frbstl/stlouisfed/files/pdfs/bullard/remarks/2022/nov/bullard-louisville-17-nov-2022.pdf?sc_lang=en&hash=4725A924300B1A6777E788822AF33277
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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