It was a chaotic week of news headlines and most economists and investors watching economic data are expecting more inconsistencies going forward. The Federal Reserve continues to raise interest rates in order to “fight inflation” and many fear that they will take the rates too high – essentially breaking something in the economic framework. Watching the economic numbers come out over the last couple weeks and the stock and bond market reactions leave more questions than answers. Let’s take a look…
The biggest surprise was to the downside - the Chicago PMI survey just printed 37.2 (vs 47.0 expectations), plunging to its lowest level since the peak of the COVID lockdowns in 2020. This was below the lowest estimate of 25 economists surveyed. In 55 years, this level of Chicago PMI has never not failed to coincide with a recession!
Another negative economic number came in with regard to the residential real estate market. This isn’t a huge surprise considering mortgage rates are higher than they have been in 20 years. After plunging by the most since COVID lockdowns in September, analysts expected U.S. pending home sales to tumble once again in October and they did, dropping 4.6% MoM (September was revised slightly higher from -10.2% MoM to -8.7% MoM). This the 5th straight month of sales declines (and 11th of the last 12 months) leaving the YoY drop down over 36% - the biggest annual drop ever. Absent the COVID collapse, this is the weakest level for the Pending Home Sales Index since June 2010!
A big surprise back to the upside was the report of employment statistics. The jobs report was hot with the monthly job gains rising to 263k from the prior 261k despite expectations for a slowdown to 200k. The unemployment rate was maintained at 3.7% while the wages were very hot: M/M rose 0.6% (exp. 0.3%) and Y/Y rose 5.1% (exp. 4.6%) This was considerably better than Wall Street was expecting. We can argue about some of the details of the report (full-time employment down and part-time employment up) – but we will save that for a later post. The basic point was that the numbers were way better than expected.
All of this up and down in economic numbers causes corresponding ups and downs in financial markets. Throw in the fact that everyone is on the edge of their seat waiting for any clues out of the Federal Reserve whether interest rate rises will slow down or not and we get some erratic markets. Erratic as the markets may be, the end result is the S&P 500 rallying back above its 200-day moving average!
On top of this move higher in stocks, the 10-year treasury note yield has come all the way back down to about 3.5%! That is quite a move higher in bond prices…
Of course, the question now is where do markets go from here? Some of the bearish traders on Wall Street have finally given up on their short positions and bought back – and some investors sitting in cash have finally given up on waiting for a pullback in stocks – they have pushed some excess cash back in the market. Is that an indicator that the up move is now done? Time will tell, but we get more nervous as the market goes higher. All eyes will be on the Federal Reserve meeting next week. Stay tuned…
Regards and good investing,
Greyson Geiler