Market expects the Fed to keep rates steady following positive data, while large tech companies reported disappointing earnings
Managing Partner, Chairman
Global Head of Corporates
Kennett Square, PA
Robust economic growth led investors to be all-but-certain that the Federal Reserve will keep rates steady at their upcoming FOMC meeting on November 1 and reinforced bets that rate cuts may not begin until June of 2024. Meanwhile, the S&P 500 traded at the lowest seen in the last five months, following disappointing earnings from tech giants.
U.S. economic data
U.S. Gross Domestic Product (GDP) came in at 4.9% (annualized pace) for the third quarter of 2023. This was the highest level seen in the last seven quarters, is significantly higher than Q2’s reading of 2.1%, and beat analyst expectations of 4.5%. The increase came from a variety of factors, most notably consumer spending, which drove 2.7% of the total 4.9% increase. The report confirmed what investors and other data readings, including Retail Sales, had been showing: despite increasing prices and higher rates, the U.S. consumer has continued to spend.
U.S. Personal Consumption Expenditure “PCE” data, the Federal Reserve’s preferred method of inflation, came in relatively in line with expectations for the month of September. Year-over-Year PCE Core (less food and energy) was 3.7%, the lowest level seen since June 2021, but still stubbornly above the Fed’s long-run target of 2.0%. Month-over-month PCE Core (less food and energy) came in at 0.3%, in line with expectations, but the highest level seen since April.
The recent U.S. economic data solidified expectations for the Federal Reserve to keep rates at the current target range of 5.25% – 5.50% at their November meeting. As far as the following FOMC meetings in December and January, the market is split between expecting the Fed to keep rates steady or to hike an additional 25 basis points. Based on where Fed Funds Futures are currently trading, the market implied probabilities for the January meeting include a 72% probability of the Fed holding steady and a 28% probability of a hike. The market is currently pricing in the first 25-basis-point rate cut in June 2024, with one to two more priced in by 2024 year end.
The 2-year U.S. Treasury yield traded around 5.00% on Friday, down from a peak of over 5.20% from earlier in October, but still near levels we have not seen since 2007. Meanwhile, the 10-year U.S. Treasury yield traded around 4.84% on Friday, bringing the inversion between the 2’s and 10’s to a level of approximately 16 basis points, the smallest level in more than a year. Although rates are near decade highs, entering into a swap will still allow a company to reduce its immediate interest expense. For example, 1-month Term SOFR was 5.32% on 10/27/23, while a company could lock in a 3-year swap rate at approximately 4.60%.
Last week, the S&P 500 traded at the lowest seen in the last five months amid yields nearing 16-year highs and following lackluster quarterly earnings reports. Disappointing earnings from big players in the tech industry including Meta Platforms Inc., Nvidia Corp., and Microsoft Coro caused the S&P 500 to approach correction territory.
All eyes will be watching on Wednesday November 1 for the FOMC Rate Decision and the press conference from Chair Powell which will follow. On the data front, the week is heavy on the labor market as ADP Employment is published Wednesday and Nonfarm Payrolls and Unemployment is scheduled for release on Friday. Finally, geopolitical developments in Israel and Gaza continue to loom in the background and have the potential to impact market sentiment and the demand for safe-haven U.S. Treasury bonds.
Subscribe to receive our market insights and webinar invites
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.23-0261
Our featured insights
Navigating market exuberance; assessing the divergence between the Fed and market sentiment
Market exuberance continued last week as risk-on sentiment continued to take hold on Wall Street. Fed rate cut expectations increased, despite Fed commentary and potential headwinds within the economic data the market is using to calibrate its expectations. The resulting deviation between the...
FOMC meeting minutes provide insight during the holiday week
The FOMC meeting minutes release headlined last week’s economic news. In the release, the Committee noted they see conditions continuing to tighten while inflation remains above their target.
Cooling markets, strengthening yen, and hopes for a soft landing
Data released this week showed that jobless claims, the U.S. industrial production, gasoline prices, and the rate of inflation have cooled off. The U.S. dollar was on track Friday for one of its steepest weekly falls against other major currencies this year, while the Japanese yen showed one of...
Powell’s hawkish turn; decline in petroleum demand brings prices down from summer highs
During a light week for economic releases, commentary from Federal Reserve leaders provided color on the path forward for interest rates. Petroleum product prices dropped to recent lows amid reduced demand and growing interest in Venezuelan oil.
Markets react to dovish Fed messaging as target rate remains unchanged
The Fed elected to hold the target rate constant last week, but dovish messaging and disappointing jobs data led markets to reevaluate the chance of future hikes.
Yields rise as Powell signals "higher for longer"
Treasury yields are on the rise as stronger-than-expected economic data and geopolitical factors continue to create uncertainty across markets. Chair Powell has signaled "higher for longer' in his speech at the Economic Club of New York, two weeks before the next Fed meeting.
Producer and consumer prices still seeing growth, as global and domestic uncertainty maintains volatility
September data releases from the Bureau of Labor Statistics offer little clarity on the future of interest rates, as geopolitical events continue to impact yields and commodity prices.
U.S. labor resilience continues despite congressional instability, higher rates, and global conflict
The Bureau of Labor Statistics provided two reports last week, which display continued resilience in the U.S. labor market despite the House of Representatives ousting its speaker and the 10-year Treasury rate hitting its highest level since 2007. Additionally, in the aftermath of the Hamas...