The first question to Jay Powell at the Federal Open Market Committee (FOMC) meeting yesterday saw him twist and turn to not  throw Janet Yellen and Joe Biden under the bus… but he did. He noted high bond yields are not associated with Wall Street's expectation of high-rate cuts to quell the economy, which means it’s associated with runaway deficit spending.

Q: Howard Schneider with Reuters. Thank you, Chair Powell, for doing this. To what—you referenced the rise in long-term bond yields. To what degree did that supplant action by the Fed at this meeting?

MR. POWELL: Thanks for your question.

I’ll talk about bond yields, but I want to take a second and just sort of set the broader context in which we’re looking at that. So, if you look at the situation, let’s look at the economy first. Inflation has been coming down but is still running well above our 2 percent target. The labor market has been rebalancing, but it’s still very tight by many measures. GDP growth has been strong, although many forecasters are forecasting, and they have been forecasting that it will slow.

As for the committee, we are committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 percent over time. And we’re not confident yet that we have achieved such a stance.

So that is the broader context into which this—the strong economy and all the things I said, that’s the context in which we’re looking at this question of rates.

So obviously we’re monitoring. We’re attentive to the increase in longer-term yields, which have contributed to a tightening of broader financial conditions since the summer. As I mentioned, persistent changes in broader financial conditions can have implications for the path of monetary policy. In this case, the tighter financial conditions we’re seeing from higher long-term rates and other sources like the stronger dollar and lower equity prices could matter for future rate decisions, as long as two conditions are satisfied.

The first is that the tighter conditions would need to be persistent. And that is something that remains to be seen. But that’s critical. You know, things are fluctuating back and forth. That’s not what we’re looking for. With financial conditions, we’re looking for persistent changes that are material.

The second is that the longer-term rates that have moved up, they can’t simply be a reflection of expected policy moves from us that we would then—that if we didn’t follow through on them, then the rates would come back down. So—and I would say on that it does not appear that an expectation of higher near-term policy rates is causing the increase in longer-term rates.

So, in the meantime, though, perhaps the most important thing is that these higher Treasury yields are showing through the higher borrowing costs for households and businesses, and those higher costs are going to weigh on economic activity to the extent this tightening persists and, you know, that the mind’s eye goes to the 8 percent—near 8 percent mortgage rate, which could have, you know, a pretty significant effect on housing. So that’s how I would answer your question.

Buyers Will Have the Usual

Technology (XLK) spearheaded the way, led by Semiconductors. I love the semis here, but they have significant work left after bouncing off the 200-day moving average (see the SMH VanEck Vectors Semiconductor ETF chart).  

Tis the Season

Seasonality has been spot-on this year, and it's looking like déjà vu all over again.

Santa’s Looking Confident

Speaking of seasonality, if this script is correct, the “Santa Claus” rally began on October 27^th.

The S&P 500 bounced and closed in the shadow of the 200-day moving average. Similar setups with the 50-day moving average failed and added fuel to the subsequent selloffs. This is a moment of truth.

Don’t look now, but the CBOE Market Volatility Index (VIX) is plunging again, and that has been good news for stocks in 2023.

It's early, but the Atlanta Fed GDPNow has fallen to 1.2% from 2.3%.

Hell to Pay

There has been hell to pay for missing earnings or guidance (we were crushed with Paycom (PAYC) yesterday). But that may change, as several stocks moved much higher on financial releases after the bell last night.

Portfolio Approach

We are adding a new position to Consumer Discretionary in the Hotline Model Portfolio. If you are not a current subscriber to our premium Hotline service, contact your account representative, or email Info@wstreet.com to join today.

Today’s Session

Interesting data out this morning.

Initial jobless claims (slightly higher than expected)

• Actual 217,000
• Prior 210,000
• Estimate 214,000

I think the real story here is continuing claims – beginning to go parabolic.

• Actual 1,818,000
• Prior 1,790,000
• Estimate 1,800,000

Continuing Jobless Claims

Third Quarter Productivity

• Labor productivity 4.7% consensus 4.3%
• Unit labor cost -0.8% consensus s+0.8%

This is huge, as it speaks to higher profits.  This is even more intriguing considering all the work stoppages and labor deals.

Important Message

Spooked out at the wrong time (again)?

This has been a brutal earnings season (see CROX this morning), and we have had our fair share.

In addition, the market moved lower three months in a row.

Individual investors have recoiled and gotten bearish.

I think this bearish swing looks like another classic setup - for retail investors to miss a great chance to make a lot of money.

Comments

Not real excited about going out and spending more than what we have in the past! Staying close to the norm, for us Charles. on 11/2/2023 10:43:26 AM

I just don’t understand why Fed doesn’t comment on how Gov. spending spree works against rate hikes by the Federal Reserve. Classic definition of insanity!!! Michael Beres on 11/2/2023 3:41:01 PM

I'm looking forward to spending LESS! Linda on 11/3/2023 8:28:27 PM

I more or less plan to spend the same. I guess that is actually less in real spending power. Barry M Buttler on 11/6/2023 11:39:16 AM

Actually a lot less than previous years D Mitch Moffat on 11/7/2023 8:45:50 AM

The same amount Cathy Green on 11/9/2023 10:33:40 AM

Hopefully a little less Mike Jones on 11/14/2023 7:32:38 PM

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