Hiking Cycle Complete?
November 6, 2023
Last week’s data helped reinforce the view that the Fed has completed its hiking cycle. US economic activity slowed in October with a surprise miss in manufacturing PMI, confirmed by ISM manufacturing moving deeper into contraction territory and a loss of momentum in ISM services. These reports resulted in OIS markets pricing out further rate hikes, while the October Jobs Report from Friday resulted in markets pricing for rate cuts to begin in May ’24. Non-farm payrolls of +150,000 and wage growth of +0.2% mostly match levels the Fed has equated with its 2% inflation target, while some economists point to the 50bp rise in the Unemployment Rate (April at 3.4% to October at 3.9%) as an early recession indicator.
The October-end earnings season that starts next week will be important for the market narrative. These off-cycle reports include trends from the most recent month with investors paying close attention to guidance and management comments about linearity during the quarter. The October-end earnings season is heavy on retailers with COST’s miss in October same-store sales growth increasing the stakes.
Last week, the S&P 500 (SPX) gained +5.9% as a lower-than-expected Treasury refunding announcement, dovish Fed and disappointing data triggered a pullback in bond yields. The best performing groups were stocks with high levels of short-interest and perceived beneficiaries of lower rates. These included long-duration mega-cap Tech, regional banks, semis and homebuilders. We were looking for a relief rally for the SPX in the 3-5% range as 10-year yields dipped below 4.73% and something in the 5-7% range if 10-year yields broke below 4.48%. Ten year yields now sit at ~4.65% and the stark disconnect between bond yields and their fundamental drivers is no longer apparent. From here, a break below 4.48% likely requires further evidence of slowing US economic momentum, which could easily shift to increased concerns for an imminent recession and lower asset values.