10/13/23 – Economic data mixed – Fed on hold?
The minutes of the September 19-20 FOMC were truly goldilocks-like. Comments included “Bank credit conditions appeared to tighten somewhat…but credit to businesses and households remained generally accessible,” “The imbalance between labor supply and demand appeared to be easing,” and of course “the U.S. banking system is sound and resilient.” The text echoed the answers delivered by Chairman Powell at the post-meeting press conference. There is a chance of one more rate hike this year and that rates will be held at a high level for an extended period. In short it read as though the committee was taking a victory lap for their engineering of a soft landing. Bond investors were delighted by the verbiage as witnessed in the collapse of the yield curve. The yield on the 10-year note fell to 4.63% from last Friday’s 4.80% close.
Unfortunately, the release of the September CPI reversed that euphoria. Month-over-month and year-over-year headline inflation both ticked higher. The whisper on the street was looking for a surprise to the downside, not up, so naturally speculation reemerged that the Fed would need to raise the overnight rate at the November 1st meeting. Fed Fund futures imply only a small likelihood that they will do so, but the two-year note which has ticked below 5% has reversed and is closing out the week at 5.05%
The Fed speech calendar is fairly full for the coming week, so we’ll be on the lookout for any “tape bombs” tipping the committee’s hand on their reaction to the inflation report. Next Wednesday Chairman Powell speaks before the Wall Street community at The Economic Club of New York. There is a Q&A that follows but it’s basically “softball” type question as the member on the dais don’t want to be accused of embarrassing the Chairman.
JP Morgan was the first of the major banks to release earnings reporting this morning. The bank’s results were strong and better than xpected. Earning releases begin in earnest next week with the Bank of New York and Bank of America reporting on Tuesday, with the regional bank results trickling out over the coming weeks. As a point of reference, the iShares U.S. Regional Banks index (IAT) is down just shy of 30% year-to-date, while the broader banking ETF (XLF) is only down about 4%.
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