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Market Update

Early results from rising rates

November 21, 2022


Potential early effects of the Federal Reserve’s aggressive tightening policy are seen in the latest manufacturing data, pointing to signs of cooling. Expectations point towards a lower rate hike at the December meeting.

Possible early effects of rising rates

According to the Fed, last month manufacturing output nudged up 0.1%. September data was also revised to show factory production rising 0.2% instead of 0.4% as stated earlier. Utility production dropped 1.5% and mining output fell 0.4%, while auto plant production rose 2.0% amid mixed figures for other equipment, supplies, and materials. In addition, the Philly Fed’s Manufacturing Business Outlook Survey released its bleakest outlook since May of 2020. While the survey focuses solely on businesses in its district, the survey is regarded as a reliable indicator to the direction of the Chicago Fed’s National Activity Index. The Philly Fed’s Manufacturing Business Outlook Survey showed a contraction nearly three times worse than earlier projections. While rising rates have pointed to early cooling effects in manufacturing, retail sales increased more than expected in October. The Department of Commerce reported a rise of 1.3%. As inflation remains elevated, despite the recent cool-down, these retail sales figures could indicate positive consumer sentiment going into the holiday season. Until inflation fully retreats and an economic slowdown is clear, the Fed will remain hawkish. Expectations are for a 50-basis-point increase in December, a reversion from the previous four consecutive 75-basis-point hikes. Many corporates are considering how to best embrace uncertainty in 2023.

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Equities and treasury yields send mixed signals

Last week James Bullard, President of the St. Louis Fed, implied that the correct zone for the Fed funds rate could fall between 5-7%. However, current market pricing predicts a top of roughly 5% by mid-2023. Traders viewed potentially tighter monetary policy as an additional concern. The S&P 500 and Nasdaq slipped negative while the Dow Jones held mostly flat over the week. Long-term treasury yields dipped significantly. This sharp fall in treasury yields has resulted in the largest inversion between the 2-year and 10-year since 1982. This inverted yield curve has been a leading recessionary indicator and experts further opine that The Fed’s tactics will not avoid a recession.

Source: FRED. The chart illustrates the difference between the 10-year and 2-year treasury rate. A negative yield differential indicates an inverted yield curve.

The week ahead

The Chicago Fed National Activity Index, durable goods orders, and jobless claims will be key reports giving insight into the current pulse of the U.S. economy. The FOMC minutes will also be posted during this holiday week.

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