I'm not sure how the much-increased hostility and tension ahead of Israel’s ground invasion will affect the stock market, but these headlines will become more common.

The geopolitical risk is the war widening. The outcomes seem apparent, but so does a surprise terror attack on Israel. And yet, here we are. Traditional safe haven names continue to sink. Utilities (XLU) and Real Estate (XLRE) are now below their October 2022 low points.

Yesterday, markets became unmoored trying to interpret the inner meaning of Jay Powell’s speech and comments to the Economic Club of New York.

I think the most crucial line was delivered at the start (italics).

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Before our discussion, I will take a few minutes to discuss recent economic data and the outlook for monetary policy.

Recent Economic Data

Incoming data over recent months show ongoing progress toward both of our dual mandate goals—maximum employment and stable prices.

Inflation

By the time the Federal Open Market Committee (FOMC) raised rates in March 2022, it was clear that restoring price stability would require both the unwinding of pandemic-related distortions to supply and demand, and also restrictive monetary policy to cool strong demand and give supply time to catch up. These forces are now working together to bring inflation down.

After peaking at 7.1 percent in June 2022, 12-month headline PCE (personal consumption expenditure) inflation is estimated at 3.5 percent through September.1 Core PCE inflation, which omits the volatile food and energy components, provides a better indicator of where inflation is heading. Twelve-month core PCE inflation peaked at 5.6 percent in February 2022 and is estimated at 3.7 percent through September.

Inflation readings turned lower over the summer, a very favorable development. The September inflation data continued the downward trend but were somewhat less encouraging.

The labor market

In the labor market, strong job creation has met a welcome increase in the supply of workers, due to both higher participation and a rebound of immigration to pre-pandemic levels.2 Many indicators suggest that, while conditions remain tight, the labor market is gradually cooling. Job openings have moved well down from their highs and are now only modestly above pre-pandemic levels

To date, declining inflation has not come at the cost of meaningfully higher unemployment—a highly welcome development, but a historically unusual one.

Conclusion

My colleagues and I remain resolute in our commitment to returning inflation to 2 percent over time. A range of uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little. Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment. Doing too much could also do unnecessary harm to the economy.

Given the uncertainties and risks, and how far we have come, the Committee is proceeding carefully. We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.

The 10-year bond yield hit 4.99%.  Five percent is supposed to be a big psychological trigger but it feels anticlimactic. 

Jay Powell tried to downplay any economic messaging from the spike in yields.

Today’s Session

The stock market and bond market seem to have bristled at comments from Jay Powell yesterday, but CME Fedwatch still sees a rate cut next June.

So, the pendulum swings again, and instead of a potential tradable upside breakout, the S&P 500 has to hold at key support. I think 4,200 is critical.

Comments

Charles, with the tight housing market and significant increases in valuations, is this something that might be getting overlooked coming next year and impacting the economy around what the consumer will be able to spend? The increase YoY associated with property taxes (where applicable) are typically in the low to maybe mid-single digits for most, based on prior approved tax percentages and smaller valuation increases. I suspect that homeowner that have seen their home value increase by ~30% (some even more) will be shocked as they receive notice around what they owe or for those with escrow included in the mortgage payments see the result of it. Along with it being passed on to those who rent as a future increase, once their current leases are up. With everything else going on, how much impact might this potentially have next year? Is this yet another shoe that may drop, too many on the floor already in my opinion? Just guessing this is outside the scope of the Fed-R hindsight data point analysis. Thoughts? Terry Dowler on 10/20/2023 12:02:18 PM

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