11/04 - Weekly Economic Highlights

As expected at the November 2^nd meeting, the Federal Open Market Committee (FOMC) raised the fed funds target rate by 75 basis points for the fourth consecutive time to a range of 3.75 – 4.00%, the highest level since 2008.  The statement was initially perceived by the market as dovish, with the possibility of slowing the pace of rate hikes as soon as December or February.  However, as the press conference unfolded, a more hawkish tone became evident.  Fed Chair Powell indicated that the Fed has “a ways to go” with rate hikes to combat persistently high inflation, and that it is “premature to be thinking about” pausing.  He reiterated that the risks of pausing too soon outweigh the risks of slower economic growth.  He commented that rates would likely reach higher levels than projected and that policy would need to remain restrictive for some time.  The Fed acknowledged the cumulative tightening of monetary policy and the lag in its effects on inflation and the economy.  There was no change to the pace of balance sheet reduction, which is expected to continue at a pace of approximately $95 billion per month.  

Other central banks around the globe also raised rates this week in an effort to fight inflation.  The Bank of England delivered a 75-basis point hike for the eighth increase in a row to 3.00%, and the Reserve Bank of Australia increased its main policy rate by 25 basis points to 2.85%, its highest level since 2014.  Tighter financial conditions are weighing on consumer sentiment and the outlook for global economic growth.

The U.S. labor market remained robust in October.  Nonfarm payrolls increased by 261,000 jobs, exceeding expectations for 193,000, with a net upward revision of 29,000 in the prior two months.  Job gains were broad-based, with healthcare, professional and business services, and leisure and hospitality leading the way.  Average hourly earnings rose 0.4% for the month and 4.7% year-over-year.  The unemployment rate ticked up to 3.7% from 3.5%, and the labor force participation rate dipped to 62.2%. The underemployment rate, including those marginally attached to the labor force or working part-time for economic reasons, edged up to 6.8%.  While the pace of job growth is moderating, the report demonstrates a strong demand for labor and provides the Fed further support for continued rate hikes.

Other key economic indicators demonstrated softening trends this week.  The ISM Manufacturing Index declined to 50.2 in October from 50.9 in September, and the ISM Services Index slowed to 54.4 in October from 56.7 in September.  Both indices remained just above the breakeven point of 50, indicating that the overall economy expanded for the 29th consecutive month; however, trends are on the decline.

Rates continued their march upward this week as market participants digested a hawkish Fed outlook.  The 2-year Treasury rose to 4.68%, the 5-year rose to 4.35%, and the 10-year increased to 4.16% (as of this morning).   Equity markets fluctuated but finished the week down after a much-needed October rally.  Fed funds futures are now showing a peak rate of approximately 5.12% in June, 2023. We believe the FOMC will continue to implement restrictive monetary policy until inflationary pressures subside but will look for an opportunity to slow the pace of rate hikes as economic growth moderates.

Next Week:

CPI, University of Michigan Sentiment, Consumer Credit, Wholesale Trade and Inventories

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© 2022 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. Data source: Bloomberg, Federal Reserve, and the U.S. Department of Labor. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rates.