Top-Level Takeaways
- The FOMC announced a fourth consecutive 75-basis-point rate hike at its Nov. 2 meeting but opened the door for slowing the pace of hikes at future meetings.
- There have been positive signs of slowing demand and easing supply disruptions, but inflation and labor market data remain too hot for the Fed to consider a “pivot” at this point.
- The sharp rise in benchmark yields and widening of spreads have made near-term expected returns in high credit quality fixed income as attractive as we’ve seen in more than a decade.
We are quickly approaching the end of what has been a tumultuous year for financial markets. Both economic and monetary policy uncertainty remain high, and the Fed just moved forward with a fourth consecutive 75-basis-point rate hike its Nov. 2 FOMC meeting. This marks 375 basis points of rate hikes in fewer than four months, with more presumably to come. However, the committee did open the door for a slowdown in the pace of future rate hikes. Although not completely unexpected, chair Powell made it clear that a pause in rate hikes is not under consideration at this point.
The price action in financial markets remained volatile in recent weeks. On Oct. 21, Fed watcher Nick Timiraos of the Wall Street Journal kick-started a rally in front-end Treasury yields when he penned an article titled “Fed Set to Raise Rates by 0.75 Point and Debate Size of Future Hikes.” The 5-year Treasury yield proceeded to fall nearly 40 basis points in the next five trading sessions, only to reverse course again following better-than-expected economic data and a seemingly contradictory follow-up article by Timiraos on 10/30. Timiraos’ second article was titled “Cash-Rich Consumers Could Mean Higher Interest Rates for Longer,” which falls more in line with what Jerome Powell has been stating for several months.
Although the personal savings rate has fallen to 3.1% — the lowest since 2008 — that rate doesn’t reflect the enlarged stimulus-driven savings that increased the base level, effectively countering the Fed’s efforts against inflation.
There are some positive signs we might be closer to the end of hawkish central bank policies, but it is still premature to speculate on that front, particularly with household balance sheets still holding a unusually high amount of excess savings thanks to pandemic-related monetary and fiscal stimulus. To be sure, there are signs that personal consumption is slowing, as evidenced in part by the Q3 GDP report. Wage growth, as measured by the Employment Cost Index, slowed to 1.2% q/q in Q3, down from 1.4% in Q1 and 1.3% in Q2, but it still remains at a historically high level. The labor market simply remains stubbornly resilient.
This market commentary is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Visit trustcu.com to read about the latest economic data and overall market trends.
Jason Haley is ALM First’s Chief Investment Officer, joining the firm in 2008. He heads ALM First’s Investment Management Group (IMG) and is portfolio manager for the Trust for Credit Unions mutual funds. Jason and his team are responsible for leading the investment process and investment theme development for the firm. Jason also oversees all capital markets activities, including portfolio management, trading, market research & commentary, and execution of hedging and funding strategies for the firm’s depository clients.
Jason holds a MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.