S&P 500: 5.85% DOW: 5.07% NASDAQ: 6.48% 10-YR Yield: 4.55%
Last Week on WallStreet - November 4th, 2023
Halloween week on Wall Street turned out to be far from eerie for investors and instead delivered the S&P 500's most robust weekly gain since November 2022. The week was filled with treats in the form of data, commentary, and policy decisions that collectively propelled both equity and bond prices globally. In a reversal of the trend seen over the past few months, which had led to a decline in asset prices, yields throughout the bond market saw a significant drop. This shift was attributed to remarks made by Fed Chair Jerome Powell, conveying there may be a potential conclusion to the rate hike cycle. Economic data further reinforced the notion of a labor market that might finally be loosening and an economy displaying signs of cooling after a red-hot third quarter. These developments have diminished the likelihood of a hawkish stance from the Fed in the future, resulting in lower expectations for interest rates and more favorable pricing dynamics for both stocks and bonds. If the Fed is indeed finished with its rate hikes, we now enter a new phase in the cycle, where questions regarding the path and ultimate destination for the economy take center stage.
Beneath the surface, interest rate-sensitive sectors experienced the largest benefit from yields falling across markets but all 11 sectors finished in green this week. Real Estate (+8.5%) and Financials (+7.4%) led the way as rates sank. Bringing up the rear were Energy (+2.4%) and Staples (+3.2%).
Fed Extends Pause on Rate Hikes But Keeps Door Open to Moving Higher
- Officials voted unanimously to leave rates unchanged at 5.25% - 5.5%, a 22-year high
- Fed officials have now skipped a rate hike for two consecutive meetings
- Federal Reserve Chair Jerome Powell hinted the central bank might be done raising interest rates for now but was careful not to rule out another increase
- In addition to the FOMC decision, the Treasury Department announced it will be slowing the pace of increases in its longer-dated bond offerings
The key takeaway - As is with any FOMC meeting, the decision itself rarely catches the market off guard; however, it's the remarks from Jerome Powell that tend to produce fireworks. Investors analyze Powell's comments, searching for hints about the future direction of monetary policy. It seems that Powell's statements implied to the markets a preference toward avoiding further interest rate hikes unless strong economic data emerges. Inflation, while bumpy, appears to be following the intended trajectory, while the economy maintains stability. The Federal Reserve is now in a waiting game, monitoring whether inflation or the economy might crack under its pressure. Additionally, the Treasury Department garnered attention from the market this week when it released its latest refunding plans. The results alleviated investor concerns that the department might opt for larger-than-anticipated borrowing or rely more heavily on long-term bond issuances. Instead, the overall borrowing has come in below expectations, with a focus on shorter-dated bonds, prompting a rally in the bond market.
US Payrolls Increased by 150,000 in October, Less Than Expected
- Nonfarm payrolls increased by 150,000 for the month, against the consensus forecast of 170,000 and September's 297,000 figure
- The unemployment rate rose to 3.9%, the highest level since January 2022
- A more encompassing jobless rate that includes discouraged workers and those holding part-time positions for economic reasons rose to 7.2%
- The labor force participation rate declined slightly to 62.7%, while the labor force contracted by 201,000
The key takeaway - Throughout this entire hiking cycle, both investors and the Federal Reserve have been eagerly awaiting signs of an easing in the extremely tight labor market. Such indications would suggest that wage and economic growth might alleviate their inflationary pressures. While recent reports have shown hints of this phenomenon, the payroll results from Friday provide strong evidence of a labor market undergoing a softening process. It's worth noting that, in absolute terms, the job market remains robust; however, the underlying dynamics suggest that a continued relaxation of labor market conditions is becoming increasingly likely. The decline in the number of jobs added, slower average hourly earnings increases, and an uptick in unemployment all contribute to this perception. This report adds to the data supporting the conclusion that the Fed's series of interest rate hikes may be over.
US Economy Slows in October, ISM Services Survey Shows
- The ISM services index fell to a five-month low of 51.8%, below expectations of a 53% reading
- The employment barometer declined sharply, remaining just above contraction territory, while new orders rose
- The ISM Manufacturing index dropped to 46.7, its lowest point since July and short of the 49.2% forecast
- New orders, production, and employment all fell for manufacturers
The key takeaway - The October ISM reports reveal an economy that has experienced a slowdown after a third-quarter characterized by substantial growth. Both the Services and Manufacturing indexes took an unexpected downturn after services showed remarkable resilience throughout the year and manufacturing recently staged a modest recovery after several months of decline. The employment indicators suggest a slight weakening in labor market conditions. Additionally, the prices paid indexes indicate that inflation, as reported by business expenditures, is somewhat stickier than anticipated.
From Around the Watercooler
Sam Bankman-Fried, former CEO of FTX, was found guilty by a jury on all seven charges of fraud and conspiracy
Apple sales declined for the fourth straight quarter noting poor results from the weakened Chinese market
Toyota gave its US factory workers a raise following the UAW's big wins against Detroit's Big Three
The Texas Rangers won their first World Series title in franchise history, defeating the Diamondbacks in five games