Markets were down for the week after Wednesday’s FOMC meeting poured cold water on dovish hopes but rallied on Friday after mixed jobs data. Chairman Powell said that it was “premature” to consider a pause. Also, the Chairman specified he would prefer to overtighten, though he did not think they had done so yet, rather than take the pressure off too early. The consequences of a stop-start policy can lead inflation to become entrenched and more difficult for the Fed to vanquish.

While Mr. Powell was hawkish, there have been some green shoots for the doves recently. Fed officials are increasingly commenting that their tools might not be able to affect certain inflation drivers. The Fed’s task right now is incredibly fraught with risk. The labor market is still hot, energy and food remain volatile, and the stock market itself is overvalued relative to bonds.

The key developments from the FOMC meeting were:

• Markets were disappointed in their hopes Powell would show some light at the end of the tunnel. He ended up doing the opposite and suggested that next month’s Summary of Economic Projections (SEP, or “dot plot”) would be higher than what was released in December.
• While he did open the path for a potentially lower rate hike, the fact the terminal rate will likely be higher negates any joy that would come from a hike that is merely 25 bps lower.
• Powell made clear that, given the tools available to him, he would rather overtighten and correct it with accommodative policy than stop tightening too early.

This week’s releases of jobs data signaled continued growth in the labor market. Tuesday’s JOLTS data showed strong demand in September, with higher MoM job openings (10.7M vs. 10.3M) and fewer layoffs (1.3M vs. 1.5M). Payroll processor ADP on Wednesday reported 239,000 new jobs in the private sector in October, beating estimates of 195,000, with wages increasing 7.7% on an annual basis. In both cases, hospitality and leisure appeared to be driving the trends. As with ADP numbers, the Department of Labor reported jobs data that beat expectations. Per the DOL, the economy created 261,000 new nonfarm jobs in October, more than the 205,000 expected. The headline unemployment rate increased from 3.5% to 3.7% which was more than expected. This was definitely a mixed report. While payrolls advanced, they did so at the lowest level since December 2020.

Energy and Industrials continue to hold up well. Crude closed at $92.60 today. However, Technology was slammed this week. Most of large-cap Technology is near 52-week lows. Meta has cratered in the wake of their latest earnings report and the increasingly common position that their massive investments into the metaverse may prove fruitless, or at least not worth the massive sums. Unlike their other Big Tech competitors, they are highly concentrated on this as a future growth area. Without this being successful they are just a shrinking ad business. Time will tell. Mark Newton believes rates will be particularly crucial here. If we get some relief in rates and Tech is able to stabilize this would be a major positive. If rates continue tearing upward, there could be more pressure on Tech and thus the indices as well.

Prices of wheat and corn on global commodities markets spiked on Monday after Russia pulled out of the Black Sea Grain Initiative, a deal that had allowed vital Ukrainian grain exports to safely pass through the Black Sea despite the war. Russia had announced on Saturday that it would suspend its participation after an alleged drone attack by Ukrainian forces on its Black Sea fleet in the Crimean city of Sevastopol – a claim Ukraine denied. After diplomats around the world warned that ending the initiative would cause what the British ambassador to the United Nations called an "unprecedented wave of hunger and destitution," Russia agreed to allow the shipments to continue, sending grain prices falling back to recent trend lines. The United States agreed to help supply Ukraine with tanks for the first time today. Russia has been raining bombs on Ukrainian power infrastructure as winter approaches and the city of Kherson, occupied by the Russians since the early days of the invasion, will likely soon be assaulted by their invigorated and well-supplied Ukrainian adversaries.

This stop-start in food prices caused by the war in Ukraine and continuing escalation illustrates why matters are so hard for the Fed. As powerful as their monetary tools are, they cannot move the frontlines in the East or strike peace between two increasingly truculent combatants. Nor can they affect the dramatic disruptions to supply chains and commodities caused by the war. The question more and more commentators are asking is, if the Fed can’t control these things, then why do we have to bash our economy and consumers if it won’t even stop the inflation? As we mentioned, some Fed officials began discussing the same question as well. We’ve been seeing a lot of the leading data painting a picture of falling inflation. We think it’s only a matter of time before the more lagging headline indicators like CPI catch up.

Boston Fed President Susan Collins said that the Fed tightening cycle was entering a new phase that would likely involve smaller rate hikes. Richmond Fed President Thomas Barkin echoed her sentiment but also repeated Powell’s recent assertion that they will need to bring the terminal rate above 5%. Our Head of Global Portfolio Strategy has been saying in recent weeks that his work and meetings indicated the terminal rate would be coming up. It looks like Nick Timiraos struck paydirt again as well. He had suggested this was the potential path in one of his recent articles.

In Brazil, President Jair Bolsonaro on Tuesday announced that he would agree to a transition of power after his opponent, former (and now future) President Luiz Inácio Lula da Silva was declared the winner of Sunday’s tightly contested runoff election. It wasn’t a concession, and it wasn’t an admission that the election was legitimate. Still, after months of warning that he would contest any result that didn’t involve his being declared the victor, it was close enough. 

China’s zero-COVID policy met the so-called “Happiest Place on Earth” on Monday as the government ordered an immediate lockdown of Shanghai Disney, with any guests who didn’t immediately rush out before the gates locked being forced to remain until they could be tested (and produce a negative result.) The dubiously good news: rides continued to operate while visitors were trapped inside. Despite this and other lockdowns still in effect, Chinese markets (and China-related stocks in the U.S.) rallied this week on unconfirmed rumors on Chinese social media that the country would soon pivot from zero-COVID and reopen. The Hang Seng was up more than 8% for the week, and the Shanghai market rose by 5%.

While our Washington Policy Expert Tom Block cautions that polling is very uncertain today, indicators and markets are suggesting a Republican victory in the midterm elections that could potentially result in a majority in both chambers. The Senate is less certain, but the House is likely. One thing we have noticed is a divergence between what consumer inflation expectations are and what the bond market is implying. As we mentioned last week Republican inflation expectations have been higher than their Democrat counterparts. So, in the event of a Republican victory, it is reasonable to expect inflation expectations to start to move towards what the bond market is implying. We think this is more likely than the other way around.

We have also seen signs of the slackening in labor markets that the Fed is hoping for. The unemployment rate edged up, and on a MoM basis, the DOL’s new jobs number continued to decline. Anecdotal reports also lent support to this narrative: the National Retail Federation projected that retailers would hire significantly fewer seasonal workers for the holiday season (450K-600K, down from 2021’s 669K), a cost-cutting effort amidst fears of a looming recession. Amazon announced a freeze on corporate hiring due to economic uncertainty. In other job news, Twitter on Friday was in the midst of mass layoffs as Elon Musk seeks to trim what observers estimate will be about 3,700 jobs from the payroll.

The Bank of England on Thursday followed in the Fed’s footsteps by raising rates 75 bps (to 3%) as it warned that the UK would likely remain in a “prolonged” recession that matches or exceeds anything the nation has experienced since the 1970s. Bank Governor Andrew Bailey commented, “I don’t think anyone should think that central bankers in any sense feel good doing this. But it’s our job.”

Next week, all eyes will be on the 2022 midterm elections. According to the non-partisan group OpenSecrets, spending on federal and state races will exceed $16.7 billion (includes spending by outside groups including super PACs), making them the most expensive midterms ever. Our Washington policy analyst Tom Block will release his US Policy report on Wednesday instead of the usual Monday, discussing what we got for all that money and what it might mean for financial markets. 

Regardless of what happens in the upcoming elections we’d urge you to treat all your countrymen with respect and kindness. The assault on Speaker Pelosi’s husband has no more place in our society than the attempted assault of Supreme Court Justice Kavanaugh. Markets themselves function as an extension of the liberal political machinery we should all cherish. Without rule of law, markets fall apart. Political parties try to get people engaged by painting their opposition as a hyperbolic mirage that simultaneously enrages and motivates their targeted audiences. Remember it’s a mirage. Remember to honor your countrymen and debate collegially on points of disagreement instead of demonizing or dehumanizing them. Remember despite the ever-degrading invective how lucky we are to have elections.

In 1998, much of the world thought the United States and international community would bail out Russia for what then seemed like a princely sum of around $20 billion. Maybe that was the most expensive $20 billion ever not spent. Instead, the global community chose to let Russia default which helped eviscerate the nascent democracy that was forming and paved the way for the rise of a ruthless KGB agent named Vladimir Putin. Generosity and understanding can produce untold dividends, friends. Don’t forget to vote!

“At the bottom of all the tributes paid to democracy is the little man, walking into the little booth, with a little pencil, making a little cross on a little bit of paper—no amount of rhetoric or voluminous discussion can possibly diminish the overwhelming importance of the point.” -Winston Churchill