Did The Fed Just Blink? The Markets Think So!

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Equity markets closed at week’s high, nearly 5%, with half the gains that took place on Friday (October 21). Big news also came in Bondland. The 10-year Treasury yield broke the 4% barrier and is now above 4.2% (see table). Bond yields continued to rise higher due to continued sharp comments from some Fed governors.

But, on Friday, after seeing weeks of carnage in the forex (FX) markets, those scathing comments (the Japanese yen near 150/$, a level last seen in 1990; the yen was 131/$). 115/$ in late July and March) and, of course, the drama unfolding in the UK over the liquidity crisis in their pension funds (not to mention their political turmoil), the Fed has had a slight change of heart and indicating a lower terminal rate for the financial markets. This led to Friday’s equity market decline and some significant reduction in short-term Treasury yields (see table).

Wall Street Journals Nick Timiros, Fed’s “Go To Man” When They Want to Send a Signal to Markets “Unofficially” Friday’s WSJ editing That the Fed would discuss “stepping down” rate hikes after November’s 75 basis point (bps) increase. That’s why both equity and fixed income markets came under fire (DJIA +749; 2-year T-note 4.48% on Friday versus 4.61% on Thursday). Furthermore, during the market trading day, as if rehearsed (maybe it was!), Mary Daly (SF Fed) reinforced the notion that the Fed should begin planning for smaller rate hikes.

This appears to be in direct contrast to his rough comments at the start of the week. The same May Daily said “4.5% to 5.0% is the most likely outcome” and that the Fed “will hold onto that point for some time.” Indeed, earlier in the week, Bullard (St. Louis Fed) also said that two more 75 bps hikes were likely in 2022 (75 bps in both November and December Fed meetings). And Esther George (KC Fed) was also in a flurry earlier in the week when she said “you could see a terminal funds rate higher (4.5% – 5.0%) and stay there longer.”

The end result is that now hopefully, uber-hawkish rhetoric has begun to change, due to the chaos in the FX markets and the resulting liquidity in some markets at home (see more below).

Note that this is not even a “pivot” or “pause”, but rather a “step-down” to reduce the market’s view of the “terminal rate”. Remember, in this cycle, due to the Fed’s new “transparency,” the markets immediately reevaluate where the Fed has indicated they are headed. Thus, because we expect less bullish rhetoric in the coming days and weeks, both bonds and stocks are priced higher.


The Fed’s track record of forecasts (ie, dot-plots) is pretty poor (37% accuracy according to Rosenberg Research). But, despite the poor track record, the bond market regards the points as gospel. As we’ve written in previous blogs, bond market volatility would be much lower if they returned to days without “transparency”. To show how volatile the FOMC’s thinking is, and thus subject to significant change, look at the spread of the 2024 dots (yellow dots for 2024 on the dot-plot chart).

Clearly there is no consensus among the members of the voting committee on where the economy will be in just 14 months. (Yet despite the lack of consensus, these people are causing havoc around the world!) As a result, we feel that the potential for a major policy error is high and, in our view, the Fed itself in such a stance. has changed.

Still, on Friday, at least we were the first step away from over-aggression.

incoming data

Accommodation: Single-family fell -8.1% m/m in September, starting at -4.7% (down from six in the previous seven months) and below a -41% annualized rate over that seven-month period. Multi-family starts were also down (-13.2% m/y in September), but they are still up +17.6% y/y. The number of apartments under construction is +27% Y/Y (highest growth rate since 1973). When these go online (private sector figures already see the impact here) there is an issue in the CPI and PCE price indexes that rent inflation will turn into deflation.

In fact, the Fed and the media have ignored the sharp decline in the housing market, the most sensitive sector of the economy. New and existing home sales and single-family start-ups are in free fall. Current home sales have now declined for eight consecutive months and Y/Y sales are down -23.8%. The last time that happened was March to October 2007. Remember what happened next?

Mortgage purchase applications are down -38% Y/Y. As interest rates have risen, home affordability has fallen due to an increase in monthly payments for a certain level of borrowing. Home prices always adjust downwards when rates rise. And, in this case, the rates have more than doubled the YTD. This is going to affect consumer confidence, at least for 65% of the population that owns a house, and is not a good omen for future household wealth and spending.

The full impact of housing on the economy is not yet reflected in the overall economic data, but it will be noticeable this quarter.

labour market: In previous blogs we discussed the discrepancy of over one million jobs between seasonally adjusted (SA) and non-seasonally adjusted (NSA) data. on Tuesday (October 18) investor trading daily Title read: Federal Reserve Pivot Coming in December: Here’s Proof (by Jade Graham). According to Graham, “this year’s seasonal adjustment” [provided] Average boost of 539,000 jobs relative to the average seasonal adjustment from March to September over the past nine years.” The article said that the October seasonal factors for 2018, 2019 and 2021 reduced payrolls by -465K, -533K and -709K, respectively Remember, the BLS changes all SA data each month by January, but only releases the previous month’s data to the public. The massive discrepancy between SA and NSA data should disappear by the end of the year (if it The October labor market report could have a major impact on Fed policymaking. The day is set to expire on Friday, November 4. It may be that the Fed is privy to labor numbers ahead of its public release, but, as a result of its flamboyant rhetoric for the past months, it is almost certain that we will be on November 2. will see a 75 bps rate increase. However, according to Graham, if the October/November labor report is significantly weaker, the Fed’s The set of meeting of December 13-14 cannot dampen even the expectation of 50 bps. Only time will tell!

Other incoming labor market data suggests the labor market is probably not as “strong” as the Fed believes:

  • Challenger reported (October 6) that companies planned to hire 380K workers in September, down from 940K a year ago and the weakest level since 2011. In addition, layoffs announced in September were 68% Y/Y, while hiring plans were down nearly – 60%.
  • walmart
    , for example, plans to hire 40K employees for the holidays over the last year; Macy’s numbers are 41K this year versus 76K last year. fedex
    Announced a major cost-cutting plan and is shutting down some sorting features. Last year the company hired 100K seasonal employees, but, as of this writing, has not indicated its intention for this holiday season.
  • Microsoft
    Meta (Facebook), Twitter, and Netflix
    Everyone has announced job cuts. And full-time employees are being replaced with part-time ones (note that part-time employment has increased 10% Y/Y).
  • Note that the current unemployment rate is at a low 3.5% (we’ll see if it stays there after the October labor report), work week hours YTD have fallen, and part-time jobs have boomed. (Since the BLS counts part-time jobs as full-time, we do not see an emerging weakness in the payroll data.) The tighter job market narrative also appears to be at play, as businesses are cutting hours instead of letting employees go. .
  • Finally, we should remember that since the BLS does not survey small businesses, they add a large number (from a one-time study) to the payroll data (called the birth/death model) each month. So far this number is +950K in 2022. In fact, the real trend in business creation is negative.
  • From May to September, there has been an increase of around +450K in multiple job holders, while there has been a decline of -139K in full-time positions and an increase of +464K in part-time positions. These are not indicators of the strength of the labor market.


The strict Fed policy does not have an immediate effect on food prices, rent, education or medical costs. And these were up +0.8% in the latest CPI report. But it has had an immediate impact on the last month (interest rate sensitive items): prices of furniture, equipment and moving expenses fell -0.1%, -0.3% and -2.3% respectively in September (no doubt because there were fewer homes). sold). Used car prices were down -1.1% (down three months in a row). Prescriptions fell -0.1%, IT services -0.1%, apparel -0.3%, theater tickets -0.6%, sporting events -2.9% (and -2.8% in August), and hotels/motels -1.2% (down or flat now) four consecutive months).

other data

  • In real (inflation adjusted) terms, retail sales contracted at a -3% annualized rate in Q3, down in four of the past five months, and flat on a Y/Y basis.
  • So far in Q3 most reporting banks have increased their loan loss reserves as consumers have borrowed on their credit cards…

Credit: www.forbes.com /

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