This morning the attention of Wall Street turned to the U.S. economy, with a number of releases before the opening bell. The report of highest importance to the Federal Reserve and investors was the latest data on personal income and spending, specifically the Personal Consumption Expenditures (PCE) Price Index. The PCE, a measure of the prices that people living in the United States pay for goods and services, is the gauge of inflation most closely watched by the central bank.
The October PCE Price Index (+0.3%) was on par with the prior month’s pace and down notably from earlier this year. The core-PCE, which excludes the volatile food and energy components, rose 0.2%, down from the September increase of 0.5%. On a 12-month basis, the PCE and core-PCE increased 6.0% and 5.0%, respectively, both down from the September figures. These metrics showed some moderation in inflation and not surprisingly, the equity futures, which were slightly higher heading into the report, took another step up and are indicating more buying at the start of trading stateside.
We also received some news on the labor market today. Specifically, the Department of Labor reported that initial jobless claims for the week ending November 26th totaled 225,000, which was a 16,000 decline from the prior week’s figure. Conversely, continuing claims increased. This comes on the heels of yesterday’s November report from payroll processor Automatic Data Processing (ADP) showing private-sector jobs creation of 127,000 positions.
The November ADP figure was notably below both the prior-month tally and the consensus expectation. This may be a sign that the Fed’s intention of slowing employment gains to tame wage inflation is working. We also learned from the Job Openings and Labor Turnover Survey (JOLTS) that job openings decreased last month, which the Fed views as also a positive step for its effort to slow wage inflation. Later this morning, at 10:00 A.M. EST, we will get the November reading on manufacturing activity from the Institute for Supply Management, a trade group. That survey will be watched for signs of some possible stress in the manufacturing sector after the ADP report showed a huge decline (over 100,000 positions) in manufacturing jobs last month.
Meanwhile, the market rallied yesterday on commentary from Federal Reserve Chairman Jerome Powell at the Brookings Institution, a nonprofit public policy organization based in Washington, D.C. Although the Chairman did not change his view that the bank’s federal funds rate may have to reach 5.00% by mid-2023 and stay at that more-restrictive level for a longer duration, he did say that the pace of interest-rate increases should start to moderate, beginning with this month’s Federal Open Market Committee meeting. The consensus is that the lead bank will implement a half-point hike to the benchmark short-term interest rate after four consecutive 0.75% increases.
In general, investors cheered the slightly less-hawkish stance from the Fed leader. They also liked his assessment that labor market conditions may be cooling a bit and that a likely decrease in prices for goods in coming months will put some downward pressure on inflation overall. Both the foreign-exchange value of the U.S. dollar and Treasury market yields fell on his commentary, which many market watchers felt presaged a possible Fed pivot on interest rates, and the equity market rallied notably in the second half of yesterday’s session.
The Dow Jones Industrial Average, which lagged the broader market in the first half of yesterday’s session on the weak manufacturing data in the aforementioned ADP labor report and a disappointing Chicago PMI, which is an assessment of manufacturing activity in the Chicago region, rallied on Mr. Powell’s comments. Not surprising, the big winners were the higher-growth sectors, particularly technology issues and small-cap stocks. Those two areas are typically more interest-rate sensitive and would likely get a boost from more moderate increases to the federal funds rate going forward. The NASDAQ Composite, which was flat for the month heading into the final trading day of November, rallied more than 4% on Chairman Powell’s remarks.
The assumed pivot by the Federal Reserve signaled by its Chairman may serve as a near-term catalyst for equities in December, which has historically been a good month for the stock market. That said, we would not recommend that investors throw caution to the wind, as stocks will face some headwinds at the start of next year, including slowing economic growth and an expected drop in fourth-quarter earnings for the S&P 500 companies. On point, shares of technology companies Salesforce (CRM) and Snowflake (SNOW) are down in pre-market action, despite those companies reporting solid quarterly results, on more dour near-term operating outlooks. Salesforce also announced that co-Chief Executive Officer Brett Taylor is leaving the company at year’s end. From an economic standpoint, the Treasury market yield curve remains inverted and the spread between yields on the two- and 10-year Treasury notes is the largest in 40 years. This may be an indicator of some economic troubles ahead. In this environment, a portfolio mix of high-quality stocks and cash is recommended.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
CLICK HERE for more information on our services or call 1-800-VALUELINE (1-800-825-8354). Our account managers are available Monday through Friday, 8:00 AM to 6:00 PM Eastern Time.
