The two-day FOMC meeting concludes Wednesday.  It is expected Fed officials will maintain their resolutely hawkish stance, laying the groundwork for interest rates reaching 5% by March 2023.  The markets have fully discounted the fourth consecutive 75 bps increase boosting the overnight rate to 4.0%.

The discussion may be focused upon how large of an increase at the December meeting…50 bps or 75 bps?

The overnight rate has been increased logarithmically in 2022.  On January 1 the rate was 0.00% and whether the year end rate is 4.5% or 4.75% is relatively insignificant based upon the YTD surge.

Many are now asking has the Fed acted to aggressively.  Should the central bank pause to determine the impact of past actions as it takes 6-9 months to feel any change in monetary policy?

As noted several times, the nation’s $31 trillion debt (and growing) has an average maturity of 58 months and an average yield of 1.0%.  Yields have quadrupled over the last year and the Federal Reserve must quell inflationary pressures to preserve fiscal order.  Hypothetically the debt service coverage would triple in the next several years, an increase that could greatly impact other federal expenditures.

Is the Fed taking the “least bad” option given the infinite number of ramifications if the debt service coverage does potentially increase to unforeseen levels?  I think an argument can be made to support this view.

Commenting about Friday’s data, two key inflation gauges posted firm increases, underscoring persistent pressures that will support hawkish Fed policy.    The employment cost index (ECI), a broad gauge of wages and benefits, rose 1.2% in the third quarter.  This met expectations and was a slight deceleration from the previous quarter’s 1.3% increase.  The PCE deflator—a key measure of inflation utilized by the Fed—did not rise as much as expected…rising by 5.1% versus the expected 5.2% increase.

Also released Friday was the University of Michigan survey that indicated households expect prices to climb 5.0% over the coming year, up from a 4.7% projection in September. Analysts had expected a 5.1% increase.    Over the next five to 10 years, they see annual inflation of 2.9%, also a slight increase from the previous month.   This reading met expectations.

Equites rallied off the data believing inflation and inflationary expectations might have peaked.   Stocks were also lifted by AAPL’ s earnings which met expectations, the inverse of the other mega sized technology firms.

Speaking of profits, Bloomberg reports that 24% of companies that have posted results have disappointed, the most since 1Q20.  Wil this trend continue?

October is almost over.  The S & P 500 is on track for a 8% gain, reversing September’s 9.2% decline.

What will happen today?

This week’s economic calendar is crowded with a number of top tier releases.  The JOLTS Job Opening is released as are both the ISMs, several manufacturing surveys, trade gap, and a host of employment surveys ending Friday with the release of October’s BLS Labor Report.

Last night the foreign markets were mixed. London was up 0.11%, Paris down 0.12% and Frankfurt up 0.17%.  China was down 0.77%, Japan up 1.78% and Hang Seng down 1.18%.

Dow and NASDAQ futures are off 0.25% and 0.50% as the Dow is about to post its best October since 1976 according to CNBC. The 10-year is off 5/32 to yield 4.04%.


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