Ingram's November 2022

I N A N U T S H E L L

by Ken Herman

Good News Is Bad News; Bad News Is Good News

Conditions long-considered positives may prompt the Fed to keep raising rates. But will easing inflation alter that plan? The job market was strong during October. Job openings increased as the quit rate rose, but job growth continued. The unemployment rate also rose, but not outside of the extraordinarily low range it has been in since March. Generally good news all around, except for the folks at the Fed intent on taming inflation. Considered from the Fed’s perspective, positive job reports may be frustrating, providing more of the same thing they have seen all year. During the news conference that

one-day decline in more than a decade, with the rate on the 10-year Treasury falling 32 basis points to 3.82 percent. Driving the sentiment: Core and headline consumer infla tion were weaker than expected in October, fueled by a decline in used car and truck prices, cheaper airfare, and health insurance costs. The U.S. Labor Department reported a 0.3 percent month-over- month rise in October’s core Consumer Price Index, compared to forecasts for 0.5 percent, marking the

followed November’s meeting of the Federal Open Markets Committee, Chairman Jay Powell made a big deal about how much rates have risen so far this year—albeit from near zero. But he also insisted that rates had not risen enough, citing recent inflation and employment reports. Part of the Fed’s plan to contain inflation is to boost the unemployment rate, but consistently solid job growth is so far preventing that from happening. Powell is intent on acclimating the public to much-higher rates, but doing it gradually to avoid a financial shock. The proof? Start by thinking how expectations have changed. In January, the market expected 2.25 percent peak Fed funds, and the December 2021 forecast

softest reading since September 2021 for core CPI (it came in at 6.3 percent on an annualized basis). The headline CPI figure, which factors in volatile food and energy prices, climbed 7.7 percent from a year earlier, vs. expectations of 8.0 percent, and compared to an 8.2 percent clip seen in the previous month. The moderation in prices could give

Core and headline consumer inflation were weaker than expected in October, fueled by a decline in used-car and truck prices, cheaper airfare, and health insurance costs.

confirmed these expectations as entirely reasonable. Guid ance to 4 percent would have been shocking in January. Now, Fed funds are at 4 percent, and few seem to think they are all that high. While that in itself proves nothing, think about how and why the concept of a reasonable peak rate has changed since January.

the Fed more breathing room in terms of slowing down the pace of its aggressive rate hikes. Some Fed officials even hinted at a downshift following the data, like Dallas Fed President Lorie Logan, who said, “while I believe it may soon be appropriate to slow the pace of rate increases so we can better assess how financial and economic conditions are evolving, I also believe a slower pace should not be taken to represent easier policy.” According to the CME’s FedWatch Tool, the markets are now pricing in an 80.6 percent probability of a 50-basis-point hike, rather than one of 75 basis points, when the central bankers gather for their policy meet- ing next month.

An Impressive Rebound

And now for the crazy day the capital markets had on Nov. 10. “Explosive,” “shock,” and “relief” are some of the adjectives being used to describe the rally as stocks recorded their best session since the early days of the pandemic in 2020. When all was said and done, the Dow Jones Industrial Average and S&P 500 closed out the session up 3.7 percent and 5.5 percent, respectively, while the tech-heavy NASDAQ Composite Index skyrocketed 7.4 percent. U.S. government bond yields also recorded their steepest

Ken Herman served as the Managing Director of Bank of America Global Capital Markets and was the Mayor of and served on the City Council in

Glendora, Calif. E | Editorial@

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November 2022

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