Anxiously Awaiting the Pause (or Pivot)

As markets digested a 0.25% rate hike from the Fed and the failure of First Republic Bank, stock indices generally fell last week, with the S&P 500 down -0.80%, the Dow Jones down -1.24 %, and the NASDAQ near flat, up 0.07%. Bonds sold off on the rate hike and debt ceiling disagreement, with the Bloomberg Agg ending down -0.31%. Alternatives continued to be mixed, with Bitcoin futures up 2.01%, gold up 1.29%, and silver up 2.79%, while oil fell -7.09%.

Last week, regional banks saw pain with KRE, a regional bank ETF, down -10.1% on fears of contagion and generally weakened balance sheets, after the FED (hopefully) hiked rates for the final time this cycle. Regional banks have seen pain this year as higher interest rates have led dual struggles with losses on bond portfolios (i.e., mortgages) and attractive returns on money market funds that fueled deposit flights. Banks with larger exposures to depositors outside the $250,000 FDIC insurance guarantee have seen increased risks of bank runs, as uninsured depositors take flight to safety.

In economic news, the highlight of the week was the decision of the Federal Reserve to increase rates by 0.25% (as expected) bringing overnight rates to the 5.00-5.25% range. This rate hike is expected to be the final rate hike in the series with expectations of a pause or even a pivot. Importantly, although employment has remained robust as inflation has shifted to cooling, industries tied to leading economic indicators have pushed the outlook bearish, which could actually bring about a rate decrease. Futures markets currently price a 1% probability of interest rates remaining at or above the current level at the December FOMC meeting and are pricing a likely 100bps rate cut by the January 2024 FOMC meeting.

Employment data came in last week, and the future of Fed policy is expected to strongly depend on job market strength. Initial jobless claims came in slightly above expectations at 242K SA (Seasonally Adjusted) and continued the trend of slowly rising off October 2022 lows. Continuing jobless claims (SA) came in at 1,805k, a 71.5k downward surprise but generally inline with slower hiring of impacted workers since the October 2022 trough. Payrolls data came in with a higher than expected growth in Nonfarm Payrolls (SA) at 253.0k, and the unemployment rate tied the low of this business cycle, 3.4%.

In the week ahead, Wednesday is the most anticipated figure of the week bringing CPI data followed by PPI data on Thursday. CPI (Consumer Price Index) is the traditional measure of inflation and headline CPI is expected to be 5.0% Y/Y, while core CPI (CPI less food and energy) is expected to be 5.4% Y/Y, as cheaper oil has been a relief to the overall inflationary theme. PPI (Producer Price Index) is expected to come in at 2.4% Y/Y for headline and 3.3% for core.

In geopolitical events, unrest remains in Sudan. As the conflict continues, ceasefire negotiations are underway, despite continued airstrikes and skirmishes. In the United Kingdom, the coronation of King Charles III was held Sunday, seeing him ceremonially installed as King.  In the United States, the Writers Guild of America Strike continues seeing the filming of live TV, TV series, and movies halted, as ongoing writers’ contributions are unavailable. In Ukraine, the aerial strikes intensified in the days leading up to the Russian Victory Day celebration, seeing at least 60 drones launched amid missile strikes.

Last week saw markets digest a FOMC meeting, a rate hike, and the failure of First Republic Bank, while the week ahead brings us fresh CPI and PPI data. As markets strive to form accurate outlooks and economic measurements continue pouring in, some investors continue to worry over what happens next.  The anxiety for future Fed decisions and the impact they have on markets gives us reason to remember Matthew 6:33-34 and see reason to leave tomorrow’s anxiety for tomorrow. “But seek first the kingdom of God and his righteousness, and all these things will be added to you. Therefore, do not be anxious about tomorrow, for tomorrow will be anxious for itself. Sufficient for the day is its own trouble.” We’ve got our eyes the potential outcomes of these future decisions, but we remain committed to being active along the way.

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