Efforts by the U.S. Federal Reserve to begin lowering short term interest rates are being challenged by stubbornly low unemployment, low(er) yet persistent inflation, and steady domestic economic growth. Scheduled to meet next week, the FOMC is widely expected to lower the Fed Funds rate by 25 basis points. The market has been reigning in expectations for more aggressive cuts, however, as the yield on the 2yr Treasury has surged from 3.54% in late September to 4.12% as we go to press.
The Unemployment Rate for October came in as expected at 4.1%, with no change from the prior month. Nonfarm Payrolls increased a mere 12k, however, versus expectations for a rise of 100k. Average Hourly Earnings ticked up slightly higher than expected at +0.4% MoM, and have risen +4.0% YoY. The Labor Force Participation Rate came in at 62.6%, slightly below expectations. Although lagged, the JOLTS number for August showed 8,040k job openings, while the weekly Initial Jobless Claims data suggest a still strong labor market.
Inflation data for September came in slightly hotter than anticipated with headline CPI up +0.2% MoM (versus expectations for +0.1%) while core CPI rose +0.3% (also higher than expected). Year over year consumer prices rose +2.4%, while ex food & energy prices are up +3.3%. At the wholesale level, final demand was flat on the month, while core PPI rose +0.2%. PPI was up +1.8% for the year while core PPI rose +2.8%. Lastly, the Core PCE Price Index rose +0.3% in September, and was up a stronger than expected +2.7% YoY.
Third-quarter GDP growth came in slightly weaker than forecast at +2.8%, also down from Q2’s +3.0% rate. Personal Consumption, however, showed a strong +3.7% growth rate, signaling that US consumers with paychecks are stilling willing spenders. Consumers account for nearly 2/3 of the US economy. The Housing market was an area of weakness, as higher mortgage rates have stymied existing home sales (-1.0% in September), while Housing Starts dipped -0.5%. Mortgage Applications dropped -17% in mid-October as the surge in interest rates made its way into the mortgage market.
Market volatility has surged over the past month as investors attempt to position portfolios ahead of the US presidential election. Bond yields have surged as both candidates make unrealistic spending promises. The Fed will be hard pressed to deliver the number of rate cuts currently anticipated by the market, given the ongoing strength of the US economy. Next week should bring more clarity, assuming there is a clear winner in the election, and the Federal Reserve delivers further guidance on monetary policy. Investors should brace for a volatile period ahead.
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