November 2, 2023
Good morning,
Yesterday’s FOMC decision surprised no one. The Fed left its target range for the funds rate at 5.25% to 5.50%. The only noteworthy change to the statement was the inclusion of tighter financial conditions, in addition to tighter credit conditions, acknowledging higher bond yields. In his presser, Chair Powell continued to emphasize that the Fed will proceed carefully. Future rate hikes and how long they will remain restrictive will be based on “the totality of the incoming data, the evolving outlook, and the balance of risks.” The incoming data is likely to be softer, the outlook uncertain, and the risks more balanced. He stayed on script. The market is only assigning a 15% chance of a December rate hike. Economists, by survey, think the odds are higher than that due to upside inflation risks in Q4, but see less than a 50% chance of a December hike at this point.
The bond market’s rally (yields dropped, prices rose) yesterday seemed an over-reaction, if it was all based on the FOMC meeting. Like the stock market since Monday, bonds were oversold and due for a rally. In addition, the Treasury’s refunding details yesterday may have eclipsed the Fed’s decision – thank you, Janet Yellen. Without drowning you in detail, it was announced that next week’s refunding would be less than expected and front-end loaded to the shorter end of the duration curve. In English, the Treasury (JY) is expressing its view that rates will not go meaningfully higher going forward. Very small detail, but a bond market that oversold only needed a spark.
Bottom line – the Fed remains restrictive, and investors are left to interpret key economic data in the coming weeks.
Over in equities, yesterday was the third straight day of rally. From Friday’s low, the S&P 500 Index is up +3.3% and bouncing right up against the 200-day mav (moving average) – a decent level of resistance for a bounce rally. It is the first test for this rally – stay tuned.
Be well,
Mike
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