A shift in economic news from signs of a boom to signs of a slowdown sent interest rates plunging and stocks soaring. As often, the market’s reaction is likely overdone.
The Week That Was
The October ISM business surveys pointed to a modest downturn in manufacturing and continued growth in service companies. Friday’s employment report showed private payrolls slowing to a 1 percent annual growth rate over the past three months.
However, the October ISM report for service companies shows the economy continued to expand, with an increase in new orders and persistently strong inflationary pressures. This
report suggests that, despite various indications the economy is slowing, the Fed continues to face challenges in slowing the economy and containing inflation.
Things to Come
There is no significant economic news due this coming week.
Money, Money, Money
The Fed did what we expected—keeping rates unchanged. However, the central bank continues selling $95 billion in securities each month. Our measure of money is now back down to where it was two years ago.
As the Fed continues to sell, the money supply in December will be back to where it was in October 2021.
The Fed has removed more than a trillion dollars from the economy since the middle of 2022. This is the main reason interest rates have risen.
The planned sales of an additional $190 billion in December, along with the large Treasury demand for credit, will continue to put upward pressure on interest rates.
Although inflation will continue to ease, the Fed is likely to keep short-term interest rates elevated until there are clear signs price pressures have eased.
The impressive rally in bonds indicates interest rates have likely peaked. Even so, we expect any further declines in interest rates are unlikely until next summer or fall.
Market Forces
Stocks soared this past week, as all the major indexes gained 4 percent to 6 percent. Technical indicators improved significantly as the S&P500 soared back above both its 200-day moving average and 50-day average by midday on Friday.
The surge in stock prices reversed the prior week’s declines amid a growing assumption that interest rates have peaked. A decline in the yield on 10-year T-Notes from the recent peak of 5.0 percent to 4.5 percent seemed to confirm this assumption.
The sharp fall and rise in stock prices is due to a shift in economic reports. A week ago, the news was all about soaring spending from summer and into September. This week, the news was less euphoric. October business surveys seem to confirm a weakening in business activity.
Abrupt shifts in economic news are common at major turning points in the economy such as we are currently experiencing.
Outlook
Economic Fundamentals: negative
Stock Valuation: S&P 500 overvalued by 14 percent
Monetary Policy: restrictive
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