Disinflationary economic data spurred significant rallies across both equity and fixed income markets during November, as investors began pricing in Fed rate cuts beginning early to mid-2024. While various economic reports published during the month do suggest inflationary pressures are waning, we remain some ways away from the FOMC’s stated goal of 2% inflation. The U.S. economy remains strong, with employment full, housing demand robust and consumer spending stable (but possibly declining).
On the labor front, Continuing Claims edged above 1.9mm mid-month, suggesting some loosening in the job market. Weekly Initial Jobless Claims data hovered around 215k over the past 4 weeks, while the JOLTS report for September (admittedly somewhat stale data) showed 9.5 million openings. The US Unemployment Rate for October was 3.9%, with nonfarm payrolls growing by a less-than-expected 150k. Average Hourly Earnings (AHE) came in slightly below expectations at +0.2% MoM (versus estimates of +0.3%), although on a year over year basis, AHE grew by +4.1%. No matter how one measures it, the US labor market remains steady at this point.
Headline inflation, as measured by the Consumer Price Index (CPI), was muted in October, with prices flat MoM (versus estimates for a +0.1% rise), while on an annual basis, CPI rose +3.2%. Ex food & energy, consumer prices edged up +0.2% MoM, and +4.0% YoY. At the wholesale level, prices fell -0.5% in October versus expectations for a +0.1% rise. Core PPI was flat (versus +0.3% estimate). The PCE Deflator was also unchanged, while the PCE Core Deflator rose +0.2% MoM and +3.5% YoY.
Supporting the case for an economic slowdown, The S&P Global US Manufacturing PMI for November came in at 49.4, just below expectations. The ISM Manufacturing print was 46.7, below expectations, while the ISM New Orders registered 48.3, above expectations, though still soft.
As mentioned above, investors appear to be pricing in a series of interest rate cuts beginning mid-2024. To the extent inflationary pressures remain stubborn, markets may be disappointed. The next FOMC meeting is Dec 13th, and we would expect Fed officials to address the recent move higher in risk assets, and perhaps take the opportunity to more appropriately manage investor expectations. This could inject into markets a higher degree of volatility than many anticipate. Stay tuned.
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