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It did not take long for the market to lose last week’s FOMC euphoria. All it took was some post-meeting remarks from Federal Reserve officials, along with a few weak Treasury auctions. This week was filled with comments from various Fed officials that, for the most part, leaned toward maintaining the current restrictive monetary policy. The market still kept the door open for an end to rate hikes with a greater possibility of rate cuts in early 2024. Federal Reserve Chair Jerome Powell’s comments late yesterday pulled the plug on that hope. In his opening remarks at the International Monetary Fund Conference in Washington, Powell pointedly said, “If it becomes appropriate to tighten policy further, we will not hesitate to do so.” Those few words put the possibility of a rate hike back on the table and pushed shorter term yields higher. Powell said he is not confident the Fed has achieved a sufficiently restrictive stance to bring inflation down. He vowed to continue to move carefully, “allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening.” To be clear, the Fed Chair did not say anything that hasn’t been said before, but the tone of his comments was perceived more negatively than what was portrayed at the November FOMC meeting.
As for the weak Treasury auctions, the lack of buyers and the wide spread between the median to high yield in the bidding process for the bonds sold this week signaled problems to come. The tipping point was the worst 30-year Treasury bond auction since August 2011. Treasury auctions are rarely a significant market mover, but the recent weakness suggests the Treasury will continue to have a difficult time finding buyers for an increased slate of bonds. As with any selling process, a seller has to lower the price to counteract low demand. In the case of securities, a lower price equates to higher yields, which will ultimately cost the Treasury more to fund its already over-extended debt load.
Key Indicators this Week
Consumer Credit – Consumer borrowing continues to grow despite rising interest rates. Total consumer credit increased $9.1 billion in September, according to the most recent Federal Reserve data. Revolving credit, which includes credit cards, rose $3.1 billion, or 2.9% for the month. Credit card balances are $154 billion higher than they were a year ago, the largest annual increase since 1999. Non-revolving credit, such as school tuition and auto loans, grew $5.9 billion, a modest increase after plunging $30 billion in August. Total outstanding credit in the third quarter rose 0.4% compared to a 2.1% rise in the second quarter due mostly to changes in student loan debt, which dropped by $28 billion. The government’s forgiveness of nearly $39 billion in student loan debt and interest accrual caused a surge in loan payments in September. Outstanding debt at credit unions remains at 13% of all outstanding debt.
Consumer Sentiment – The preliminary monthly survey on consumer sentiment reveals consumers shifted from feeling the best in two years to the worst in six months about economic conditions. The University of Michigan Consumer Sentiment Index reflects growing concern about rising inflation, high borrowing costs and labor market weakness. Consumers expect gasoline prices to rise over the short and long term despite current gas prices falling since September. The long-term inflation indicator rose to the highest since 2011. Nearly one in five consumers surveyed said that unemployment will cause more hardship than inflation over the coming year.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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