SMG - Is The Fed Done?

2023-11-01 16:19:38 ET

Summary

• The Federal Open Market Committee kept interest rates steady at 5.25-5.5%.
• Fed Chairman Jay Powell says the question is whether the FOMC should still hike.
• The Atlanta Fed's GDP Now forecast sinks to 1.2% growth in Q4.

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The FOMC keeps rates steady at 5.25%-5.5%. (0:15) Jay Powell says the questions is 'should we hike more ?' (1:20) Atlanta GDP Now forecast for Q4 tumbles on weak manufacturing. (0:59)

The following is an abridge podcast.

No curveballs today.

The Federal Open Market Committee kept rates on hold , in the range of 5.25-5.5%. The market had priced more than a 99% chance that the Fed would hold off for the second meeting in a row.

The economic data has been solid recently, but some cool inflation signs allowed the FOMC to allow the tightening to keep working through the system.

The statement was barely changed from the previous meeting, but did add a mention of tighter financial conditions. That is likely a reference to the recent surge in longer Treasury yields. It also tweaked language to acknowledge stronger Q3 growth.

In the markets the initial tone was definitely bullish for equities and the 2-year Treasury yield ( US2Y ) dropped 10 basis points.

Bond traders also seemed to tee off the Atlanta Fed’s latest GDP Now forecast, which sank to 1.2% for Q4 growth. Atlanta’s GDP Now had gained some trendiness after a solid prediction of Q3 growth and ended up stealing a little FOMC thunder as today’s report was delayed.

But once Fed Chairman Jay Powell took the mic, the tone changed.

Powell said the Fed isn’t confident it has reached the stance for 2% inflation or that financial conditions were restrictive enough. He added that the question the Fed is asking is “ should we hike more ?”

Pantheon Macro's Ian Shepherdson says "Powell is holding onto rate hike optionality like his life depends on it. He just won't budge. Yet."

Stocks pared gains. The S&P ( SP500 ) is now up slightly. Treasury yields came off their lows. The 2-year is at 5%. The 10-year ( US10Y ) is above 4.8%.

Before the decision, rates had been lower while growth stocks were moving higher after a weak measure of manufacturing that could possibly lower the odds of one more Fed hike.

The October ISM manufacturing index fell to 46.7 , shy of the consensus of 49.

Pantheon 's Shepherdson says "The drop in the headline index is larger than the regional Fed manufacturing surveys signaled, and leaves it only modestly above the cycle low of 46.0, reached in June. Manufacturing activity started to recover over the summer, but the recent back-up in rates has delivered a fresh blow to capital investment and put the recovery on hold."

The ISM, along with construction spending, was a chief reason the Atlanta Fed GDP Now forecast sank so precipitously.

Elsewhere, the Treasury refunding announcement premarket wasn’t the big splash that many expected. The Treasury seemed to read the room in regards to the recent run-up in long-term yields, It announced offering $112 billion of Treasury securities to refund ~$102.2 billion of privately held Treasury notes maturing on Nov. 15. That was slightly lower than the Bloomberg consensus of $114 billion.

There was mixed data on the labor front. ADP’s measure of October private payrolls showed a gain of +113,000, below the consensus of 150,000, but job openings in the September JOLTS report unexpectedly rose.

Julia Pollack, chief economist at ZipRecruiter, says “’Changed little’ is the most repeated term. We're going back to the days when JOLTS was flat as a pancake and seldom made headlines.”

Looking to active stocks today

CVS Health ( CVS ) reported $2.3 billion in net income for Q3, bouncing back from a net loss in the year-ago period driven by a one-off charge related to its opioid lawsuits. On the top line, CVS reported a better-then-expected $89.8 billon in revenue as all three major business segments exceeded Street expectations.

Estee Lauder ( EL ) shares tanked after the cosmetics company cut its full-year outlook citing slower pace of recovery in net sales and margins. For fiscal 2024, the firm now expects adjusted diluted net earnings per common share to decline between 33% and 25% on a constant currency basis. Net sales are estimated be -2% to +1% versus the prior year.

And Scotts Miracle-Gro ( SMG ) surged after the company exceeded expectations for Q4. CFO Matt Garth says “Our guidance is grounded in our ability to increase shareholder value through margin recovery, strong free cash flow generation, and improved financial flexibility.”

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