Weekly Wisdom – November 3, 2023

By Hightower Great Lakes on November 3, 2023

Fed Decision

The Federal Reserve Open Market Committee left monetary policy unchanged this week, which was largely expected. Several Fed speakers had signaled this stance over the past several weeks on recognition that they’ve tightened policy substantially over the past 18 months and wanted to watch incoming economic data.  

The tone from the committee was more dovish compared to recent months as they recognized financial conditions have tightened post the 11 rate hikes in the past 18 months and the lag impact it has. In fact, the only real new news was “tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation” – meaning higher interest rate policy is having its desired effect by the Fed.

At the press conference, Fed Chairman Powell noted strong economic growth, improving, yet elevated inflation and remaining data dependent on future policy actions. We were pleased to hear the recognition of the tighter financial conditions in both the release and in commentary and believe they are unlikely to raise rates further this year given the progress that has been made on overall inflation.

Just this week the 3Q Unit Labor Costs fell to levels last seen in late 2022. At the same time 3Q Productivity increased to its highest level in 3 years at a 4.7% annualized rate. Wages remain elevated at 5.7% y/y but are down substantially from just a year ago. 

The Fed made the decision to hold a month of bear steepening, which occurs when the long end of the yield curve rises faster than the short end of the yield curve and signals slower growth and/or a possible recession. We’d note many have been wrong on calling for a recession this year and we’d highlight the expansion that we’ve seen to US growth in each Q this year.

This is tied to the aggressive fiscal policies that have been put in place (infrastructure spending packages) and will remain a tailwind and an offset to higher rates.

But it’s worth noting that since September 1, the 2-year treasury yield has risen 14 bps, while the 10-year yield has risen 64 bps, seen in Chart 1 below. Many cross-factors are contributing to this movement in yields – both technical and macro. Yet it is important to note that credit spreads remain below historical averages.

Chart 1: US 2-Year Yield versus US 10-Year Yield[1]

Chart 2: U.S. High Yield Spread versus U.S. Aggregate Far Below Recessionary Periods[2]

Treasury Moves

The U.S. Treasury increased its planned sales of longer-term securities by less than investors expected in its quarterly debt-issuance plan or refunding and will sell $112 billion of longer-term securities at the auction next week versus the $114 billion expected. 

Compared to the last refunding in August, the key difference was a slower pace of increases in sales of 10-year and 30-year securities. This move resulted in a rally in both the 10-year and 30-year bonds, as they both moved 9 bps after the announcement in the morning noting that the 10-year bond yield fell 15 bps in one day.

The treasury boosted planned issuance of 2-year, 3-year, 5-year, and 7-year securities by the same amount they did in August. Regarding bills, the Treasury said it expects to maintain bill auction sizes at similar levels.

Economic Data Developments

In the past week we have received labor data that the Fed has taken into consideration. There are many cross currents – as mentioned the 3Q ULC and Productivity were much better than expected on inflation and yet the Employment Cost Index (ECI), which measures changes in labor costs, came in hotter than anticipated.

The job market as measured in JOLTs and weekly initial claims remained strong. Challenger, Gray and Christmas layoffs fell 22% y/y. However, the ADP Employment change failed to meet the average estimate (113k vs 150k est.) for the second consecutive month.  We strongly believe that the labor market remains tight even as we see mixed signals.  Our favorite measure on jobs remains the 4-week moving average at 208K – a far cry from recessionary levels of 375K. 

Chart 3: ISM Manufacturing October [3]

The bigger surprise was the weaker than expected ISM which fell to a three month low.  But in another manufacturing report from S&P Global showed manufacturing right at the 50% level (50 and above is expansionary).  Both reports showed progress on the prices paid segment – another positive for inflationary readings.   

On the consumer front, the October reading from the University of Michigan Consumer Sentiment report came in above expectations, at 63.8 versus the expected 63 reading.  This has a direct feedback loop to the strong labor market and higher than trend wages.

As there are many crosscurrents that continue in today’s economy, we like to keep the big picture in mind versus week to week changes which can be volatile. We don’t expect to continue to see 4.9% GDP growth, but 2% would be a solid reading especially when it comes to the earnings picture for corporate earnings.   

Click here to read last week’s Weekly Wisdom (10/26).

Disclosures

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This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet. As of November 1, 2023.

[2] Source: FactSet. As of November 1, 2023.

[3] Source: FactSet. As of November 1, 2023.