The Federal Reserve kept rates unchanged in a target range of 5.25-5.50% in unanimous vote at their November FOMC. Fed said economic activity grew at a “strong pace” and inflation remains “elevated”. Minor statement changes added reference to tightened financial conditions, which just repeated Powell’s remarks from two weeks ago. Each meeting remains ‘live’ but not very convincingly. The effects of the eased financial conditions at a curiously vulnerable point for inflation risk it would appear. Yields came off and with that the dollar lower and stocks higher.
Prior to the FOMC we saw move lower in bond yields after weaker US data (ADP, ISM-manufacturing) and the Treasury refunding announcement that largely repeated Monday’s guidance. The 10-year Treasury yield fell 17bps on the day mostly after this morning with the Fed’s communications adding about 4bps to the fall. The S&P 500 was up over ½% after the Fed.
Federal Reserve FOMC Statement
Federal Reserve Announcement Wednesday 1 November 2023 14:00:00 ET
The FOMC kept rates at 5.25-5.50%
Conference To Follow At 2.30 ET PM With Chairman Powell
- Unchanged rates
- Target rate 5.25% – 5.5%
Key excerpts from the Fed’s decision included:
- Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated.
- The opinion that the U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.
- The Committee also said it would continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
In the press conference, Mr. Powell acknowledged that the Fed has come very far with this rate-hike cycle and that the risks with policy decisions (doing too little or doing too much) have gotten more two-sided, whereas the risk in the first year or so of tightening was all on the side of not doing enough. Something else he made clear, however, is that the Fed is not considering any change to its balance sheet runoff plans nor is it talking about rate cuts at all right now. The question being asked is, “Should we hike more?”
Mr. Powell did not answer that question specifically. The fed funds futures market isn’t pricing in any more rate hikes over the next 12-month horizon; in fact, it is pricing in at least two rate cuts over the next 12 months, according to the CME FedWatch Tool.
Yields Lower After FOMC on Day:
U.S. Treasuries finished the session firmly higher with shorter tenors ending in the lead. The entire complex rallied off lows after the U.S. Treasury announced its plans for upcoming auction sizes, revealing that the total size of next week’s note and bond sales will be smaller than what the market had expected. The Treasury noted that it expects to increase auction sizes again next quarter to meet higher funding needs.
The FOMC Statement for November as expected did not call for another rate hike at this time, though Fed Chairman Powell left the door open to future increases during his press conference, saying that policymakers are not confident that policy is sufficiently restrictive at this time.
The 2-yr note yield, which was at 5.04% just before the FOMC decision, dropped to 4.94% as Fed Chair Powell was conducting his press conference. It the day settled at 4.97%, which is 11 basis points lower than yesterday. The 10-yr note yield, at 4.81% when the FOMC decision came out, settled at 4.79% after hitting 4.92% overnight.
Rates after release:
- 2-yr: -11 bps to 4.97%
- 3-yr: -10 bps to 4.80%
- 5-yr: -11 bps to 4.71%
- 10-yr: -9 bps to 4.79%
- 30-yr: -5 bps to 4.98%
Prior to release:
- 2-yr: -5 bps to 5.03%
- 3-yr: -5 bps to 4.85%
- 5-yr: -6 bps to 4.75%
- 10-yr: -5 bps to 4.82%
- 30-yr: -4 bps to 4.98%
The major indices started November with solid gains, closing near the best levels of the session.
- Dow +221.71 at 33274.58,
- Nasdaq +210.23 at 13061.46,
- S&P +44.06 at 4237.86
- The Vanguard Mega Cap Growth ETF (MGK) rose 1.7%
Only two of the S&P 500 sectors closed with a loss — energy (-0.3%) and consumer staples (-0.1%) — while the heavily weighted information technology sector (+2.1%) led.
Crude oil retreated for the third consecutive day while the U.S. Dollar Index rose 0.2% to 106.86.
Reviewing today’s economic data (which moved rates pre FOMC):
- Weekly MBA Mortgage Applications Index -2.1%; Prior -1.0%
- October ADP Employment Change 113K (consensus 100K); Prior 89K
- October S&P Global US Manufacturing PMI – Final 50.0; Prior 49.8
- September JOLTS – Job Openings 9.553 mln; Pror was revised to 9.497 mln from 9.610 mln
- September Construction Spending 0.4% (Briefing.com consensus 0.4%); Prior was revised to 1.0% from 0.5%
The key takeaway from the report is that there was balanced strength in September between private and public construction spending that gave a boost to total construction spending, which was up nicely year-over-year and well out of any hard-landing zone.
- October ISM Manufacturing Index 46.7% (consensus 49.0%); Prior 49.0%
The key takeaway from the report is the understanding that the pace of contraction in the manufacturing sector accelerated in October, which is something that will be construed as a weakening indication for the economy in the fourth quarter that should help temper some of the acceleration seen in market rates.
November 1 FOMC STATEMENT CHANGES via @Newsquawk
The full statement from the November 2023 Fed Decision
Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated.
The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Adriana D. Kugler; Lorie K. Logan; and Christopher J. Waller.
Source: Federal Reserve
From the TradersCommunity Research Desk