We had an immense amount of data and news to absorb this week, including the words of several Federal Reserve speakers.
The easy part, this time, was Fed, as Chairman Jerome Powell set the tone, saying it was time to hike less.
The "terminal rate," which is the maximum yield the market is pricing in for next year on Fed Funds, got as high as 5.08% on Nov. 20, and it got to 4.86% as of Thursday (the market took the hikes out of its forecast). Some of that has come back today, but Powell set the stage for fewer and smaller hikes, and so far, no other Fed speaker has contradicted him. That is supportive.
Despite all that, the Two Year vs. Ten Year spread, remains almost at its most inverted at negative 76 basis points. That is not a good sign for the future of the economy.
We can look at the data in a few key categories, inflation, the economy, and jobs.
Inflation: Tamer Than Expected
Inflation was quite tame. Housing data from Case Shiller saw monthly price declines. That is consistent with some rent reports I see. The Core Personal Consumption Expenditure (PCE) Price Index component of gross domestic product came in at 4.6%, a smidgen over the 4.5%, but the PCE deflator for October was "only" 0.3%, giving further hope on the inflation front. Commodities bounced on hopes that China is on a path to exiting the Covid-Zero policy, but even that move was contained (by recent standards).
The inflation data, as a whole, backed up the view that the Fed is closer to the end of this hiking cycle.
The Economy: Not Good to Bad
The Chicago PMI data was as bad as anything I've seen. Just look at the chart:
It came in at levels we've only seen in the midst of the Covid lockdowns, at the depths of the Great Financial Crisis and at the time of the dotcom bubble crash.
While other economic data wasn't this bad, but none of it was good.
Anecdotally, I continue to hear stories about high inventories and a backlog of goods to be sold. Consumer saving rates have deteriorated, as well, which won't help this situation once we are through the holiday season. Yes, some holiday sales data seems OK, but much is being sold at a discount at may reflect pulling demand forward rather than signaling an end to problems within the retail space.
Jobs: The Outlier
Jobs were the outlier again. Though ADP published data that wasn't as strong as today's headline number (the household number was also weaker). The jobs number from 2 months ago was ratcheted down. All of this convinces me that there are some data issues in the jobs number, but it was good.
Remember, my view is that while jobs are always a lagging indicator, they will be even more lagging this time as no one wants to let employees go after spending a year of trying to hire people.
The most dangerous data of the week (other than the PMI data) was the wage growth. Again, I don't see bargaining power being that high, and there is some chatter that this is a result of some big contracts being implemented (effectively backward looking), but high wage inflation (5.1% annual) will catch the Fed's eye as that is their key metric of what will keep inflation higher for longer.
Take advantage of recent gains to lighten up positions and have a little more cash to buy if this "dip" turns into something bigger.
Positive wildcards are China (though that seems like a first-quarter event) and Russia (hints, as we've suggested, that now that the elections are over and the winter is here, some sort of peace talks might be at hand). That would be great for markets, but I'm not there yet.