Morning Report: The Fed raises rates again

Vital Statistics:

S&P futures3,730-37.75
Oil (WTI)88.51-1.52
10 year government bond yield 4.20%
30 year fixed rate mortgage 7.04%

Stocks are lower this morning after the Fed hiked rates yesterday. Bonds and MBS are down.

As expected, the Fed hiked rates by 75 basis points. The statement included language about the Fed taking into account lags and past rate hikes in order to assess the further course of monetary policy. In the immediate aftermath of the statement, stocks and bonds rallied on that statement as it seemed to indicate that the Fed was opening up the possibility of a pause in rate hikes.

The press conference poured cold water on that however, as Powell said it is “very premature” to be thinking about pausing and that “we have a ways to go on rates.” Stocks and bonds sold off for the rest of the day, and here we are this morning with the 10 year around 4.2%.

About the only positive was that Powell signaled that further rate hikes might be smaller. The December Fed Funds futures have a toss-up between 50 and 75 basis points. which would take us to about 4.5% on the Fed funds rate. Looking out to December of 2023, the futures see another 25 or 50 basis points of tightening in 2023.

Between now and December, we should get another two readings of the consumer price index and the PCE price index, so perhaps the data helps us out. I have to say I am utterly confused that the Fed would add the statement about taking into account lags and past hikes and then announce to the market that they are going to keep hiking. I mean, what’s the point of that statement? Seems strange, but that was one heck of a head fake to the stock and bond markets.

Productivity rose 0.3% in the third quarter, according to BLS. Output increased 2.8%, while hours worked increased 2.4%. Unit labor costs rose 3.5% as compensation rose 3.8% and productivity rose 0.3%. Lagging productivity has been an issue for a while, which has been contributing to inflation and lower standards of living.

Announced job cuts rose to nearly 30,000 in October, according to outplacement firm Challenger, Gray and Christmas. This was the highest level since February of 2021. Most of the cuts were in technology and the automotive sector. Construction jobs fell a we enter the seasonally slow period and are dealing with an affordability issue with housing. Despite the increase, initial jobless claims remain low at 217,000.

The services sector expanded in October, according to the ISM Services Index. That said, it decelerated from its September reading, indicating that the Fed’s rate hikes are beginning to have an effect. The one disappointment was that prices increased after 5 straight months of declines.

“Growth continues at a slower rate for the services sector, which has expanded for all but two of the last 153 months. The sector had a pullback in growth for the second consecutive month in October due to decreases in business activity, new orders and employment. Supplier deliveries continued to slow, at a faster rate in October. Based on comments from Business Survey Committee respondents, growth rates and business levels have cooled. There are still challenges in hiring qualified workers, and due to uncertainty regarding economic conditions, some companies are holding off on backfilling open positions. Supply chain and logistical issues persist but are not as encumbering as they were earlier in the year.”


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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