A slue of economic data was released this week, coupled with updates on the Federal Reserves interest rate policy outlook. Here is some data that came out and a brief commentary on the implications:
- Second Estimate of 3rd QTR Gross Domestic Product - 2.9%
- This estimate was adjusted upward from the preliminary estimate back at the beginning of November (2.6%). Remember that Q1 and Q2 GDP were down quarter over quarter sparking the recession definition conversation. Seeing the economy, lead by the consumer, be resilient in the midst of a worsening landscape actually helps fuel the case that this potential recession may not be as deep as once feared. We will see if GDP in the fourth and first quarter's continue to expand or if we have a double-dip style contraction
- PCE (Personal Consumption Expenditures) for the month of October were released. The Federal Reserve members has continually told us that this is their preferred inflationary gauge. The PCE for October was up .8% from September but only up 6% from October of 2021. This is down on a year over year basis, although it seems like overall the October inflationary read is a mixed bag with some metrics appearing to slow down while others proved intrenched yet again. Again, prior to the pandemic month over month PCE readings were around .10-.30%. The Federal Reserve will look at this number to shrink prior to cutting rates in the future.
- Manufacturing PMI - This number measures the growth/contraction of US manufacturing. For November it came in at 49 which was 1.2 points below the October level and below analyst estimate. Any reading below 50 is in contraction phase. This is a sign that the Fed's rate hikes are working in slowing down the economy as manufactures taper their orders and productivity levels in preparation for a cooling economy.
- Friday morning we saw payroll numbers announced for the month of November with the number of jobs added to the economy beating analyst expectations. 263k add versus 200k expected. The market taking good news as bad news believe that the strength in the labor market will mean that the Fed has to keep interest rates higher for longer.
Prior to Friday's labor market announcement, on Wednesday Fed Chairman Jerome Powell spoke at an event and answered questions on the current rate outlook. The focal point of his comments came when he stated that it seemed to be time to moderate the pace of rate hike. Previous rate hikes were .75 or 75 basis points, the fastest pace since the 1980's. Pundits are speculating that Chair Powell will slow the pace down to 50 basis points in the next meeting. The US stock market digested this news in a bullish way and lead the S&P 500 and NASDAQ indices to rally significantly, testing their 200 day moving averages from below.
Our viewpoint on the financial markets remains relatively unchanged. We expect the markets to be more volatile, historically speaking, and for the Federal Reserves rate policy to create fast gyrations from time to time. The question now is becoming ' how long? ' will the market remain below it's previous highs. Diversification, a resilient financial plan, and mental fortitude will still be necessary given the investment landscape for at least the next 6 months if not longer. We'd encourage investors to lengthen their time horizons as this is not the V shaped recovery we saw during the pandemic. While it won't be as fast, we are hopeful that the Federal Reserve is taking the necessary steps to set up the runway for the next economic expansion in years to come.
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