Market Commentary
October 23, 2023
No way to sugar coat last week, it was brutal for the bond market. We closed the previous week at 4.61 and finished last week at 4.91 on the 10-year…a massive 30bp increase. The main catalyst came early in the week with Retail sales which was stronger than expected. Even with an increase in industrial production and manufacturing, demand for goods is outpacing supply which naturally leads to higher prices, the exact opposite of what the Fed wants to see. This is not entirely the same narrative as before where it was the tight labor market and wage growth driving demand. We are now seeing consumer spending outpacing disposable income. It seems consumers have a honey badger attitude when it comes to post-pandemic spending habits, we just can’t stop right now.
Housing starts and building permits in the middle of the week were mixed with higher starts, but lower permits. Existing home sales fell a little, but to a lesser extent than expected. The more important Initial jobless claims on Thursday came in lower than expected highlighting the continued strength of the labor market and I wouldn’t expect this to improve over the next couple months either as we head into the holidays.
So while it was not a great week from an inflation perspective and further supports the “higher for longer” narrative from the Fed, we did get a speech from Powell that pretty much assured no rate hike in November. The futures market has a rate hike in November at just 3%. It is good to not get knee jerk reactions/comments to the most recent data as previous data suggests improvements in inflation metrics. Powell even stated they can wait and see the totality of incoming data before they make decisions on additional policy firming or how long to keep policy restrictive. Fed Governor Waller also spoke last week and somewhat echoed the same sentiment about watching the data, but seemed a little more urgent to react if “demand and economic activity continue at their recent pace”.
I think the next couple months will be enlightening as far as which direction Fed policy goes. I just hope that when shoppers are out this season and see the GI Joe with the kung fu grip (name the move…should be easy) they leave it on the shelf! The expected rate will go up a quarter point this this week as the 10-year weekly average settled at 4.87.
Have a great week!