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.
Tallying results from last week, the S&P 500 decreased by 3.35%, the Nasdaq 100 fell by 5.97%, and the Dow Jones Industrial Average decreased by 1.40%.
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%.
Yields along the shorter end of the curve rose as well, with the U.S. 2-year note yield settling at 4.663% and the 5-year note yield settling at 4.334% last week.
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.