MARKET UPDATE
November 10th, 2023
After a rough summer to early fall when equity markets fell double digits and continued declines in bond markets logged mid-single digit drops, November has been somewhat kinder to investors. While not recapturing the heady levels of the summer, the indices have made a bit of a recovery.
 
However, another federal government shutdown looms next week and comments from the Fed Chair suggesting that the job of tackling inflation is not necessarily done, have driven volatility. Chair Powell essentially said to the markets “not so fast boys and girls” we may not be done yet" - see the quote below.
 
 A bit more behind the scenes, some of the market's plumbing was impacted due to a cyber attack at the world's biggest bank (Chinese bank ICBC) which caused unsettling risk to the orderly function of some fixed income markets, especially treasury securities.

“The FOMC is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time; we are not confident that we have achieved such a stance.”
- Jerome Powell, Federal Reserve Chairman

IT'S ALL ABOUT THE LABOR MARKET
 
With UAW and SAG/ASTRA strikes largely in the rear-view mirror, and the UPS and Flight Attendant's labor contracts seemingly a distant memory, the focus remains on the relative health of the Labor market.  
 
After a bit of a bounce last week, initial claims for unemployment insurance fell modestly this week.  The 4 week moving average continues in a solidly downward sloping trajectory.  This keeps the pressure up on the Fed to watch the data before declaring victory on inflation, but ironically, also bolsters the case for a possible “soft-landing” (i.e., a slowing economy and inflation without significant dislocations in labor).
 
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SIGNS OF WEAKNESS
 
A couple of weeks have passed since we last highlighted this.  Though initial claims for unemployment are down, continuing claims for benefits continue to trend upward and are running at the highest level since early 2022.  The read between the lines here, in our view, is that hiring has slowed but companies are not so quick to let go of existing staff.  
 
There are still plenty of job openings, presumably - about 1.5 for every available unemployed worker - but some question whether this is really a bit of a fiction.  Something to continue watching as this is part of the data the Fed will be watching.
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SOME PRICE PRESSURES EASING…
 
After a dramatic rise in new automobile prices driven(pun intended) by inventory shortages during and after the pandemic, price pressures increases have begun to soften.  Though prices for new vehicles are up some 30% since 2015, the year over year increases have begun to moderate. The combination of higher interest rates and more inventory may be the forces at play here and can bode well for the narrative of declining inflation.
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BUT NOT BACK TO NORMAL (YET?)
 
The sales to inventory ratio is one way to look at the trends in auto sales.  Oversimplifying, a ratio of 1:1 means you sell one car for every car you have in inventory.  A ratio of 2:1 means you have two cars in inventory for every one you sell - or said another way, if you sell 1 car a month, you have 2 months worth of sales on the lot.  Pre-pandemic, the ratio ran at about 2.5:1 and bottomed during the pandemic at 0.4:1 when supply chains broke down and dealers could not get enough cars.  
 
This year, the ratio has begun to “normalize” but it's still not back to where history suggests it should be.  We aren't sure that it will go back to the way it was, either.  For now, it seem to continue to be a “seller's” market.
 
There are a couple of industry experts on this thread, so I may get a talking to if I didn't get this exactly right.
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WHY THE FED MIGHT BE WORRIED
 
We have written a bit about inflation coming in waves.  A month or so ago (and a few times before that) we brought this chart to your attention.  You hear very little about Median CPI in the US, but it has been researched extensively by the Cleveland Fed and is thought to be a better measure than PCE or Core CPI with regard to inflation trends.  In fact, central banks (e.g., Australia) use Median CPI as their guide.
 
We wonder after this last reading whether that second wave of inflation is taking hold, which is possibly what is driving some of the recent comments (above) from the Fed Chair.  While 2023 likely benefited from what we called “base” effects (i.e., inflation index value was higher in 2022 then same period 2023), we think that the reverse of that base effect could be something to watch in 2024.
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WEEKEND READING & LISTENING
  • Hackers Hit Wall Street Arm of Chinese Banking Giant ICBC (WSJ)
  • What are the New Tax Brackets for 2024?  (WSJ)
  • Money Talks: Touring America's Industrial Revival (Economist Podcast)

Joe
 
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