Thoughts From The Divide – Jumping the Gun, Late to the Party

“Premature to think about or talk about pausing our rate hikes”

While this week’s 75 bps hike from the FOMC was in line with market expectations, those looking for a pivot may have (potentially to their detriment) jumped the gun. Not only did Powell warn that it was “premature to discuss pausing” (avoiding “thinking about thinking about ____”?), but also, as John Authers explains, Powell went further to say that “the ultimate level of interest rates will be higher than previously expected”. Though Authers notes that “this was the worst-received FOMC day on the stock market since the beginning of 2021”, he wrote that the outcome of FOMC meeting and presser was “refreshing”, concluding, “If Powell isn’t pleased with his day’s work, he should be. As my colleague Jonathan Levin puts it, it was a masterful performance in which he simultaneously prepared the way for a step down in hikes, while tightening financial conditions.”

“Appropriate now to be thinking more about lag”

While Powell said in his opening comments that “the labor market continues to be out of balance, with demand substantially exceeding the supply of available workers”, he and the FOMC are in danger of being late to the labor market weakness party. Sure, the latest JOLTS data showed that “openings rose unexpectedly in September”, but other data and anecdata are showing that the labor market conditions may already be loosening. Take for instance, the October ISM data. Though both Manufacturing and Services headline readings were positive, the employment numbers were less so. Manufacturing Employment was “unchanged” at neutral 50.0 while Services Employment dropped to 49.1 (“[D]ue to uncertainty regarding economic conditions, some companies are holding off on backfilling open positions”). Meanwhile, the anecdata has been one sided. Trends we’ve been following in mortgage lenders continue- Wells Fargo mortgage staff are bracing “as U.S. loan volumes collapse”. However, even former market darlings are taking a more conservative approach to hiring, if not going the layoff route. Amazon announced that it would be “pausing hiring for roles in its corporate workforce”, and Apple appears to be following the same route, freezing “hiring for roles across corporate divisions”. Meanwhile, as this article notes, layoffs have already hit across a number of other tech companies, including Lyft, “Netflix, Spotify, Coinbase, Shopify and most recently payments company Stripe”.

P.S. Just as Madame Lagarde reaffirmed today that a recession may not be enough to “tame” the inflation coursing through the Eurozone’s economic veins, the latest Eurozone Manufacturing PMI noted that “The PMI surveys are now clearly signaling that the manufacturing economy is in a recession”.