October 20th, 2023
I am writing this mid week ahead of some business travel, though there is plenty of data to review and dig in on.  
The conflict in the Middle East continues and the risk of escalation has probably risen. The U.S. had one unsuccessful vote for a new Speaker of the House of Representatives when I wrote this - but another vote or set of votes was/were due to occur at some point later Tuesday.

I remain willing to support raising the federal funds rate at a future meeting if the incoming data indicates that progress on inflation has stalled or is too slow to bring inflation to 2% in a timely way.
- Federal Reserve Governor Michelle Bowman, October 2nd, 2023

US retail sales came in much stronger than expected this week, even though sentiment indicators suggest a far less ebullient consumer.  Sentiment has been falling for the last few months as interest rates continue to climb and inflation seems to be biting now.
For the July-September quarter, retail sales printed an annualized gain of 8.4% according to the US Census Bureau data.  The net effect was to push bond yields back up after they fell following the outbreak of hostilities in the Middle East.
The retail sales report is likely to give the Fed some angina and for folks like Fed Governor Bowman (quoted above), probably encourage serious thought about the next rate hike.  We don't think that will be November 1st - so that leaves the December 13th meeting for 2023.  It's possible they could wait and see until January, but we still believe another hike in '23 is the highest probability.
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A deeper look into retail sales, however, provides some perspective.  On an inflation adjusted dollar basis, retail sales growth appears more muted.  In absolute dollar terms, of course, the numbers look stratospheric, but we prefer to understand this from the perspective of inflation's impact on consumption versus the nominal dollar change.
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We have been saying this for some time, that as long as the employment situation remains as strong as it has been, we see little reason why the Fed would be in a rush to lower rates. More recently, the markets seem to be cottoning to the idea that rates will remain higher for longer.
However, there is no question that higher interest rates (manifest for most consumers in credit card, auto loan and mortgage rates) will eventually put the brakes on consumption - the question is really when?
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Capacity utilization, which measures how much of the economic productive capacity is being used has stabilized around a measure just under what many economist believe is “full capacity”.  The monthly trend has also appeared to stabilize.  So, factories and people are working (though in coming data points, the effects of the ongoing UAW strike will surely show up).
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Business Inventories, which include raw materials to finished goods, have also been declining on a dollar basis from peaks in 2022.  On the one hand, this is likely related to the easing of supply chains issues that necessitated a bit of hoarding by companies, but on the other hand, this could be a signal that inventory rebuilds may be afoot in the near future - generally a positive for business activity.
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  • Hopefully, resolution on the House Speaker issue
  • Middle East conflict
  • Earnings Season continued
  • More jobs data
  • Housing data (particularly new homes)

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