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ISM Exceeded Expectations…

Federal Reserve officials said interest rates will need to increase further and stay elevated into next year to curb inflation showing few signs of abating despite the central bank’s most aggressive monetary tightening in a generation.

Atlanta Fed President Raphael Bostic write interest rates need to rise between 5% and 5.25% and “then remain there until well into 2024.” 

The Fed has been making similar pronouncements for the past five or six months but it appears that the market is now just beginning to listen, perhaps the result of data that has consistently exceeded expectations.

Speaking of which, the top tier ISM Manufacturing data unexpectedly improved last month for the first time in six months and the prices paid component was also greater than forecasted. 

After the release of this data point, market expectations for the Fed peak rate climbed to about 5.52% occurring in September.

Because of the Fed statements and the data, both bonds and stocks declined.   Technology led shares lower however oil companies rose on the Chinese reopening narrative.   The S & P 500 closed below a key uptrend line from October’s low, a bearish indicator.  It also briefly breached its 200-day moving average.

Treasuries again sold off with the 10-year Treasury broaching a 4.0% yield.

As noted many times, the longer end of the Treasury market has confidence in the Fed’s inflation fighting prowess, however such is beginning to show some cracks.  The current inflation rate of 6.5% normally suggests a 10-year Treasury over an 8.0% yield.   If the Treasury market loses confidence in the Fed, the selloff in bonds could be of potential epic proportions.

What will happen today? Productivity data and jobless claims are released. 

Last night the foreign markets were down.  London was down 0.17%, Paris down 0.6% and Frankfurt down 0.43%.  China was down 0.05%, Japan down 0.06%  and Hang Seng down 0.92%. Dow and NASDAQ futures are up 0.30% and down 0.50%, respectively on interest rate concerns, a decline in TSLA shares following a disappointing investor’s day and upside surprise on Salesforce outlook.  The 10-year is off 4/32 to yield 4.02%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.