November 2024

Despite the extraordinary cycle of shocking world news that has come seemingly every day this December, the capital markets have been relatively stable as investors and traders continued with a laser focus on whether the Federal Reserve would cut interest rates later this month.  Specifically, close attention has been paid to the employment report and the inflation report for November.

The November employment report was a mild surprise as the actual number of new jobs added in the month totaled 227,000, a mere 7,000 more than expected and the dismal October report was revised higher by 24,000 jobs.  The unemployment rate ticked up to 4.2% due to a change in the household employment measure contracting -355,000 and a corresponding contraction in the labor force.  The two taken together would likely to be enough for the FOMC to justify another 25-basis point rate cut at the December 18th Committee meeting.

However, the Consumer Price Index for November may be a “fly in the ointment” in their rate cut plans.  The unrounded CPI, month-over-month, has been ticking up every month since July when it showed a 0.155% rate of inflation over the June measure.  The November outcome showed inflation in November rose 0.313% over the October rate of price appreciation.  With inflation moving higher, the Committee is going to find it difficult to say that they’ve contained inflation when the index is telling a different story.  We’d describe the current state of inflation as being sticky downward and higher for longer, especially given the pro-growth spending the incoming President is expected to introduce.

Fed speakers so far this month have delivered a balanced message, but the CPI may be enough to tilt them into the no cut category.  While trying to sound balanced, the Fed speakers prior to the inflation report had tacitly communicated that they’d like to cut the overnight rate one more time this year.

We’re of the opinion that Fed speakers’ ongoing communication is actually confusing the investing community and that’s clearly reflected in the markets.  On the morning of the inflation report, the Fed Fund futures market reflected a 92% probability of a quarter point cut on December 18th.  Also, the yield curve, an indirect proxy for looseness or tightness of monetary policy, has been steepening this month.  The yield curve steepens when investors fear that inflation is going to rise in the future.

As an aside, this time of year we look for clues on imbalances that could potentially cause market dislocation as the calendar year comes to a close.  The two areas that we’ve identified as offering an early warning signal, namely the Federal Reserve’s reverse repo program and the cost to forward settle foreign exchange trades have both been stable through the early weeks of December, giving us hope that no unforeseen volatility will creep into the market as we close our books for the year.

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