Global stock markets continued to rebound in November as most major indexes closed higher. For the first time in several months, bond prices increased as longer- term interest rates stabilized. Pricing pressures, which have fueled the most recent inflation upticks showed signs of moderation in November suggesting we are nearing an end to the rate hike cycle. Indeed, Chairman Powell speaking at the Brookings Institute on the last day of the month all but confirmed the markets assumptions. The market reacted to one brief excerpt from the chairman's comments. "It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring down inflation. The time for moderating the pace of rate increases may come as soon as the December FOMC meeting". This single comment boosted the S&P 500 by over 3% on November 30th.

The terminal overnight Federal Funds rate now stands at close to 5% by mid next year. The current overnight rate is 3.875%. Over 100 basis points of added monetary tightening is already priced into the market. The notable change from last month is the anticipated pace of rate hikes. After 4 consecutive 75 basis point increases, we are now looking for a 50-basis point move on December 14th. The graph below shows the anticipated trajectory of overnight rates. It’s interesting to note the market is pricing in an ease by the end of next year.

The graph above is the effectively the markets “best guess” as to where future overnight rates will be. I am keeping an eye on several indicators that could impact the projections above.

First and foremost is a very tight labor market. An historically low 3.7% unemployment rate coupled with a 5.1% year on year increase in average hourly earnings is fueling wage inflation. There are still 1.7 jobs open in the US for every 1 person unemployed. If we don’t see moderation sometime next year, the Fed will be forced to continue raising rates above the current projections.

We will also continue to monitor energy prices as we get into the winter months. Natural gas prices are appreciably higher than this time last year and we are keeping keen eye on how the added cost to the consumer impacts discretionary spending.
Finally, as split government after the midterm elections generally makes it harder for significant policy change which could be viewed as a positive for investors. On the other hand, we a facing a debt ceiling crisis that needs to be addressed. Currently the US Debt Ceiling, the amount of debt the US Treasury can issue to fund our government, is a staggering 31.4 trillion dollars. The latest projections are that number will be reached by the first quarter of 2023.

As always if you have any questions feel free to reach out.

Best,
Bob

Opinions are those of the author and not necessarily those of Guardian or its subsidiaries

The S&P 500 Index is a market index generally considered representative of the stock market. The Index focuses on the large-cap segment of the U.S. equities market. The Index focuses on the large-cap segment of the U.S. equities market. Dow Jones Industrial Average is a widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue chip stocks, primarily industrials, but also includes financial, leisure and other service-oriented firms

Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit, and inflation risk. Equities may decline in value due to both real and perceived general market, economic and industry conditions.

Statistics sources from Central Bank Rates, Bloomberg, US BLS and US Department of Education.

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