November offered a different feel for U.S. equity markets, with a seemingly calmer environment and friendly Federal Reserve comments toward the end of the month. Market bulls are somewhat jubilant about the prospects of a smaller rate hike at the December 14th Fed meeting.
Federal Reserve Rate Decision & Jobs Data
Kicking off the month on November 2nd, the Fed delivered a widely expected 75-basis-point hike, making the effective Federal Funds Rate 3.75% – 4.00%–in line with market expectations. Markets now expect a 50-basis-point hike at the December 14th meeting.
Despite Fed interest rate hikes, labor market data continues to exceed expectations. October non-farm payroll data showed a strong labor market with 284,000 jobs created according to revised data. This was notably higher than expectations of 195,000.
November jobs data also showed job gains exceeding expectations–more on that later.
Inflation & Consumer Health
October Consumer Price Index (CPI) data showed a decline to 7.7% year-over-year versus expectations for 7.9%, spurring talks of peak inflation having passed.
October Core CPI (which strips out food and energy costs) also came in below expectations at 0.3% month-over-month versus the 0.5% forecasted.
Retail sales also showed a surprise jump in October, although inflation could be causing a data skew. The consumer seemed ready, willing, and able to spend, with a jump of 1.3% month-over-month versus expectations of 1.0%.
Core retail sales (which takes out the sale of automobiles) jumped heavily, showing a 1.3% month-over-month gain versus expectations of 0.4%.
While spending looks good for consumer health, initial consumer sentiment data was disappointing, showing a reading of 54.7 versus 55.0 expected in the preliminary University of Michigan consumer sentiment data. The figure was revised higher to 56.8 upon the final data release.
Fed Signals Smaller Increases
As the markets looked ahead to Thanksgiving, minutes from the last Federal Reserve meeting gave traders and economists some holiday cheer.
The minutes showed that the Fed is looking to change gears to smaller interest rate hikes “soon.” Some Fed officials, including Federal Reserve Governor Christopher Waller, say they are open to a 50-basis-point hike at the December meeting instead of the 75-point hikes that have become the recent norm.
The December Fed meeting is right around the corner on December 14th, and markets are currently favoring a 50-basis-point hike (74.7% probability) vs. a 75-basis-point hike (25.3% probability), according to the CME FedWatch Tool.
Smaller increases would cause market bulls to cheer. We’ll see what happens on December 14th.
Bond Yields Fall
The widely monitored 10-Year Treasury Note Yield declined in November, its first monthly decline since July. It ended the month at a yield of 3.702%. The 10-year yield continued its decline during the first two trading days of December, with its weekly close on December 2nd resting at 3.507%.
Shorter duration bond yields also declined in November. Lower yields look encouraging and could help to stimulate lending across real estate markets. However, the 2/10 yield curve remains inverted.
Short-term market volatility has subsided impressively, with the CBOE Volatility Index falling to levels not seen since August. When volatility falls, it translates to investor fear leaving the marketplace.
Some investors also watch the CNN Fear and Greed Index to gauge investor sentiment, which is not showing signs of investor fear as of the time of writing.
As long-term investors, market sentiment in the short term is not a major deciding factor for most of us. However, it can be helpful for those employing dollar cost averaging techniques.
Key Technical Level
On the final trading day of November, the S&P 500 traded and closed above the widely watched 200-day moving average of around 4050. The first two days of December have seen the S&P 500 trading on both sides of this key technical level and closing above it.
The S&P 500 had not closed above its 200-day moving average since April 2022.
The 200-day moving average is calculated by taking the last 200 closing prices and dividing the total by 200. It is a widely followed metric used by many market participants.
Looking at the first few days of December, positive news abounds. December 1st featured the Core Personal Consumption Expenditures (PCE) Price Index coming in below expectations. Core PCE is the Fed’s preferred measure of consumer inflation.
On December 2nd, the latest job report once again beat expectations. The strong labor market should help leave the door open for future Fed rate hikes, although markets expect them to be smaller.
However, what will the Fed’s terminal rate (the highest interest rates will go in this cycle) be? Some believe that the terminal rate may increase, albeit in smaller rate hike increments for an extended period.
Inflation & Fed Remains Key Theme
It is still all about inflation and the Fed. However, according to data from FactSet, S&P 500 earnings showed 70% of S&P 500 companies reported a positive earnings per share (EPS) surprise for the third quarter, with 99% of S&P 500 companies reporting actual results.
Traders are looking ahead to the latest inflation data via the CPI release on Friday, December 13th, and the Fed Rate decision the next day on the 14th. The second week of December is sure to be a busy one!
With that said, while our team is dedicated to keeping you informed of the most recent market developments, it’s important to remain focused on the long term amid shifting market dynamics.
U.S. markets were on the quiet side last week in holiday-shortened trading action, yet there were still developments from the Fed.
Last week may have been holiday-shortened, but the most recent U.S. Federal Reserve policy meeting minutes offered an intriguing tone.
While we do not like to read too deeply into any one piece of Fed commentary, the recent meeting minutes showed that “a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.”
Stock market bulls cheered the news.
We do not know when “soon” is yet. However, the tone differs highly compared to the tough talk we have gotten accustomed to in recent months.
The next Fed meeting is on December 14th; the market expects a 50-basis-point hike, a relaxation from the previous four 75-basis-point hikes.
As of Monday morning, based on the CME FedWatch Tool, there was a 69.9% probability of a 50 basis point hike and a 30.1% probability of a 75 basis point hike.
Winter Energy Picture
Crude Oil: Pricing for January WTI Crude Oil fell by 4.78% last week, closing the week at $76.28 per barrel. This marked its third consecutive weekly decline.
Crude’s price decline happened despite the larger-than-expected drawdown in weekly inventory. Weak Chinese demand and increasing COVID-19 cases in China likely contributed to last week’s price decline.
Translating to the gas pump, we have the U.S. average regular gasoline price at $3.556 per gallon as of Monday morning, according to data from AAA.
Natural Gas Rises: Seemingly just in time for the winter home heating season, the price of natural gas has been rising.
A notably volatile commodity known for large and fast price swings, natural gas rose 11.44% for December last week. Talks of a supply squeeze and the EIA winter forecast contributed.
Heating Oil – Igloos? It could be an expensive winter for those folks using home heating oil. States in the Northeastern U.S., including New York, Pennsylvania, and New England, account for approximately 85% of total U.S. residential heating oil sales. And in some homes, temps are down to igloo level, according to one article.
U.S. retail home heating oil prices are averaging $5.434 per gallon at the time of writing. For folks unfamiliar with home heating oil, most residential tanks are 275 gallons, so a fill-up can run around $1,500. And that fill-up will only last a third to a half of the winter season, depending on usage.
Heating Alternatives: States like Maine are seeing a notable jump in the price of firewood as the White House is weighing a plan to increase the supply of emergency home heating oil.
It’s hard to say who will fare better this winter, those using natural gas or home heating oil. A safe bet is that we will all feel the pinch.
Holiday Shopping Season
Black Friday marks the start of the holiday shopping season. Heading into the big shopping day, the picture was a mixed one when it came to the strength of the consumer.
Remember, inflation puts a monkey wrench into consumer spending data. The National Retail Federation (NRF) forecasts a 6% to 8% annual increase in holiday sales for 2022. Since the Consumer Price Index’s last reading showed a 7.7% year-over-year rise, the projected increase of 6% to 8% in holiday sales could be interpreted as a negative number.
A clearer picture will emerge as final spending data rolls in for Black Friday and Cyber Monday.
Early indications of Black Friday sales data at the time of writing show a record $9.12 billion in online sales, translating to a 2.3% rise year-over-year. These numbers are preliminary and are subject to change.
The American consumer has indeed been resilient through a year of high inflation. However, the preliminary Buy-Now-Pay-Later data (BNPL) shows orders using the feature increasing by 78% and revenue rising by 81% versus the week prior.
Americans have gotten accustomed to certain pastime activities. Black Friday and Cyber Monday have become akin to national holidays. But with the steep cost of necessities and credit utilization already trending higher, how much more can the resilient American consumer sustain?
These credit card bills always come due in January.
Turning the Page
Although quiet, last week was constructive for U.S. equity indexes, given the Fed language and tone coming from the Fed minutes. Should interest rate increases slow, the underlying market and consumer sentiment could shift across the board.
This week, we will get another read on the labor markets courtesy of non-farm payroll jobs data. Analysts will be assessing consumer strength via the hourly wage growth metric. Consensus expectations are for a 0.3% increase month-over-month.
The employment data will be released on Friday morning and could provide a clearer picture of consumer strength during the holiday shopping season. We know the Fed will be watching heading into their mid-month meeting.
Lower-than-expected consumer inflation data launched major U.S. stock indices higher last week. CPI rose 7.7% during October versus Bloomberg analyst estimates of 8.0%. Markets loved the data, and the S&P 500 had its largest daily gain since April 2020.
Bond Yields Fall
10-year note yields fell hard last week, closing the week at 3.813%, down from their previous weekly close of 4.157%.
This sharp fall shows the conviction of market expectations for a smaller rate hike at the December Federal Reserve meeting. As of late, these hopes have been fueled predominantly by the lower-than-expected inflation report.
In addition, there’s great news for would-be homebuyers: Many mortgage interest rates fell last week in tandem with lower bond yields. When the 10-year note yield moves in one direction, so do mortgage rates. Last week, the average 30-year mortgage rate declined from the low- to mid-7s to the upper-6s.
December Federal Reserve Meeting
Markets will soon look ahead to the December 15th Federal Reserve meeting, where the probability of a 50-basis-point hike is 80.6% and the chance of a 75-basis-point hike is 19.4%, per the CME FedWatch tool as of Tuesday morning.
The lower-than-expected inflation data surely put the hopes of a 50-basis-point hike in focus, as perhaps the Fed’s rate hike crusade of 2022 is starting to show some results.
Bear Market Rally or the Start of Something Else?
After some impressive showings by the major U.S. stock indexes over the last couple of weeks, market sentiment has shown signs of improvement.
2022 has proven to be a challenging market, with inflation and rate hikes serving as the primary headwinds. Year-end is approaching, and market bulls are cheering for potentially lower rate hikes to come in the future.
Historically, market bottoming processes have taken weeks or months after extended periods of decline. The next jobs report on November 30th should impact the Fed’s rate hike decision and rhetoric at the December 15th meeting.
U.S. Dollar Eyed
The U.S. Dollar Index declined along with bond yields last week. Many traders and analysts will be watching the U.S. dollar for further weakness, as the rising dollar theme in 2022 has coincided with lower stock prices.
Has Inflation Peaked?
The general consensus at present seems to be that inflation has peaked. However, nobody knows for sure, and even if it has peaked, peaking and declining are two very different things.
Even if we have seen a peak in inflation, the Fed may have more work ahead to get the inflation rate down to its 2% target. The “work” would most likely come in the form of interest rate hikes, albeit potentially at a slower pace.
The path to reach the 2% inflation target is unclear in duration and action at this time. For now, stock market bulls are cheering the first sign of a potential decline in inflation.
Last Friday featured the most recent Preliminary Consumer Sentiment reading, courtesy of the University of Michigan’s Consumer Sentiment Index. It showed a weaker-than-expected result of 54.7. This was down from October’s reading of 59.8 and below estimates of 59.5.
Anxieties surrounding inflation persist in the minds of the collective consumer. Consumer sentiment data showed expectations of a 5.1% increase in costs from present levels over the next year–versus 5.0% in last month’s reading.
About Consumer Sentiment Index
The University of Michigan’s Consumer Sentiment Index is a survey of 500 consumers, which asks them to rate present and future economic conditions. There are two versions of consumer sentiment data, released about 14 days apart: the preliminary reading and the revised reading. Last week’s release was the preliminary data, and it tends to have the most impact of the two releases since it comes out first.
The consumer sentiment data came out the day after the CPI data, and it did not affect stock markets to the downside. Bulls continued to cheer the CPI data last Friday.
Most cryptocurrencies finished last week in the red, as the financial difficulties of the Bahamian exchange, FTX, wreaked havoc on the space.
As the FTX exchange cracked, cryptocurrencies traded lower, souring sentiment to the overall crypto space. Bitcoin finished lower by around 20% last week on U.S. Exchange Coinbase–trading near $16,300 at last check.
Bitcoin is still well above its 2020 pandemic low of around $4,000 and well below its 2021 high north of $69,000. Talk about volatility!
FTX and Big Names Like Tom & Gisele
The beleaguered exchange has forged major partnerships, including with Major League Baseball, and the Miami Heat Arena was even renamed FTX Arena.
Investors in FTX include Tom Brady and Gisele Bundchen. They are rumored to have large exposure to the exchange. Exact investments were not known at the time of writing.
Volatility, Seasonality, and Long-Term Investing
Major U.S. stock indexes rose precipitously on the weaker-than-expected consumer inflation data. Seeing the high volatility of stock indexes in both directions (up and down) is a solid reminder of why it pays off to be a long-term investor.
Markets are now in a seasonally bullish time of year, and there could be a substantial amount of cash entering equities. November and December tend to be good months for stocks, historically.
Level-headedness is paramount to success in long-term investing, and pragmatically, nobody knows with any degree of certainty that inflation has peaked yet.
The current consensus among many market participants is for smaller rate hikes at future Fed meetings. However, it is wise to consider that we are still in a higher interest rate environment that can present challenges and opportunities over an extended period.
The U.S. Federal Reserve lived up to expectations last week, raising the benchmark interest rate by 75 basis points. This marked the fourth 0.75% increase in a row.
Major U.S. stock indexes reacted in a mixed fashion to the rate decision and subsequent commentary by the Fed, trading lower on Wednesday and Thursday only to find buyers on Friday following the employment data release.
Labor Market Mixed
U.S. employment growth continued to beat expectations last week, with 261,000 new jobs added versus 205,000 expected for the month of October.
Job expectations have been low lately as interest rates continue to rise. And while the jobs number was higher than analyst estimates, it still represented the smallest number of jobs added since December 2020. In addition, the U.S. unemployment rate rose in the October report to 3.7%, up from a 3.5% reading in the previous month.
Rising interest rates are known to cool jobs growth, and there are early signs that this is happening. Still, the report is solid for October versus expectations and continues to leave the door open for further Fed rate hikes.
Yields Rise (Again)
U.S. Treasury yields rose again last week, with strength seen before and after Friday’s big jobs number release.
The benchmark barometer U.S. 10-year note yield settled at 4.157% to close out last week, up from the previous weekly close of 4.009%.
With the November Fed meeting out of the way, attention turns to December. As of Monday morning, probabilities stand at 56.8% for a 50 basis point hike and 43.2% for a 75 basis point hike.
Fed Statement vs. Press Conference
The Fed provided a mixed outlook after last week’s rate decision. Most notably, the Fed mentioned considering the “cumulative impact of rate hikes so far” in their statement.
“Cumulative” is a word that had not been used in previous Fed statements, and some consider the new language a clue regarding slowing rate hikes, potentially as soon as December. The term was perceived as dovish in tone.
On the flip side, during the subsequent press conference, Federal Reserve Chair Jerome Powell had more of a hawkish tone. Powell mentioned that the Federal Open Market Committee raised its terminal rate estimate (estimate of the highest rate of the cycle) from its earlier projections in September. He also said that it is “very premature” to consider pausing rate hikes, dashing hopes for a Fed pivot.
The final Fed meeting of 2022 will be on December 14th.
Stocks may have fallen last week, but commodities were trading higher, with the S&P Goldman Sachs Commodity Index tacking on 4.62%.
Looking under the hood of broad commodities, we saw December crude oil rise by 5.36% last week, settling at $92.61.
Strength was also seen in the grain markets, with November soybeans tacking on 4.59% last week in response to expectations for Chinese demand. Other commodities trading higher last week included gold, silver, sugar, and cotton.
In addition, while it may not feel like it on the retail side, wholesale pricing of many commodities has pulled back from higher prices earlier in the year.
The strong U.S. dollar has played a role in some commodity price declines. It will be interesting to see how commodity prices fare as we approach the holiday shopping season and year’s end.
CPI Data Incoming
Midterm elections will be in the spotlight early this week. Then, monthly consumer inflation data will capture focus on Thursday, November 10th.
This time around, markets expect an 8.0% increase year-over-year for the Consumer Price Index (CPI). Last month, CPI rose by 8.3% year-over-year.
Core CPI (which removes food and energy from data) will be on many radars again this month. Market forecasts are for a 0.5% increase month-over-month. The last two readings have shown 0.6% increases.
The critical consumer inflation metrics should tilt probabilities in one direction or the other for the December Fed meeting. Should inflation slow, perhaps we will get a 50 basis point hike in December. If consumer inflation continues running hot, it could tilt the scales for a 75 basis point hike.
Market sentiment continues to be Fed-driven, with economic data analyzed through the lens of, “what will this encourage the Fed to do?”
The narrative for continued rate hikes remains dominant, although the verbiage from the recent Fed statement leads many to wonder whether a 50 basis-point hike could be next versus a 75-point hike. This outlook currently has equity bulls cheering into year’s end.
Since there is a long lag time between rate hikes and their effects on the economy/inflation, market participants are awaiting signals that the Fed’s hikes of 2022 have had some effects. Should employment data show further signs of slowing, this would be an indication.