Focused Investing: Economy & Markets Update

Last Week

After a brief hiatus, we return following a week with few economic and market reports. That is not to say that the week was without news, most notably when Fed Chair Jerome Powell spoke Thursday and spooked the markets with the comment that the Fed is a long way from done in its fight against inflation. Comments made by Chairman Powell during the Fed press conference almost two weeks ago led many investors to believe the Fed would not raise rates again, yet would still be data dependent. Being data dependent can give the Fed wiggle room for additional rate increases. Following the press conference, interest rates declined significantly, falling almost 0.50% in a little more than two days. However, on November 9th, following Powell’s comments interest rates moved sharply higher, but not reaching the levels prior to the Fed meeting two weeks ago.

The other reports of note last week were initial jobless claims and consumer sentiment. Initial jobless claims have been rising from below 200,000 to 220,000 last week. The recent rise in initial claims and the below-expectations growth in jobs in October shows that the Fed’s rate increases may finally be influencing labor markets, which the Fed believes it must cool to bring inflation down. Even with the recent rise in initial claims, the chart (bottom) shows they remain well below prior levels (top) and therefore, do not yet show a recession on the horizon.

Consumer sentiment declined to a six-month low in early November as consumers are increasingly concerned about both the current state of the economy and the outlook for the next six months. Additionally, consumer expectations for inflation are rising which is feeding into fears of a rebound in inflation in the coming months. Supporting lower consumer spending is the credit card data, which showed a rare, and notable, $4 billion decline in credit card debt.

This Week

Last week we saw that U.S. consumers are less optimistic about the current economy and the outlook. The first report this week was the CNBC/National Retail Federation consumer spending data. At least for this report, consumers are doing what they said in the consumer sentiment survey and are reducing spending. The CNBC/NRF report showed that consumer spending declined almost 1% in October. Later this week, U.S. retail sales are likely to show a small decline of approximately 0.1% from September levels.

The reports most likely to move the markets are the consumer price index (CPI) and the producer price index (PPI). Consumer inflation is likely to show moderation in overall inflation with a rise of 3.3% year-over-year in October, down from 3.7% in September. On the other hand, core inflation, which excludes food and energy prices, is likely to show no change in the year-over-year number. The PPI is expected to be flat in October relative to September’s level. Regardless of the exact number, we believe we will get confirmation that the Fed has made progress in the fight against inflation. As it stands, it remains above the 2% level.

We also get a look at the health of the manufacturing sector with the Empire state manufacturing, the Philadelphia Fed manufacturing, and industrial production releases this week. We expect these reports will show that the manufacturing sector is in contraction territory, which is the same story the October ISM manufacturing report told us.

The economic reports from last week show the economy is slowing from the torrid pace of the third quarter and that consumer optimism has declined. This week, we expect to get confirmation that consumers are pulling back on spending and that the manufacturing sector remains in contraction territory. Most importantly, inflation is likely to have declined a bit more in October from September even though consumers do not believe it. Looking forward, we believe that inflation will decline over the next 6-8 months; much closer to the Fed’s 2% goal level. Our inflation outlook assumes no supply shocks in either the oil or food markets, which we believe is the biggest threat to lower inflation the balance of this year and next year.

Clinton S. McGarvin, CFA, is a Senior Portfolio Manager. He received his B.S in Mathematics from The University of Arizona and an MBA/MSF from The University of Denver Daniels College of Business. Later Clint received the Certificate in ESG awarded by the CFA Institute. To speak with Clint McGarvin, please contact our office at (503) 292-1041 or via email at info@allentrust.com.