Month-In-Review: October 2022

November 8, 2022

Fed officials are increasingly concerned regarding core services costs, with inflation “surprising on the upside” as some Fed officials have noted. Meanwhile, against the backdrop of price pressures still near a four-decade high, a stronger-than-expected rise in third-quarter GDP, coupled with ongoing resilience in the labor market will make it difficult for the Fed to “pivot” away from ongoing, larger rate hikes. That being said, at least some at the Fed – and in the market – are increasingly hopeful or increasingly impatient for the Fed to begin to soften its stance against rising prices, tapering the pace of policy adjustments to 50bps in December and 25bps come January. While it may be appropriate to lessen the size of rate hikes at some point to assess earlier policy changes, with inflation far outpacing the Committee’s earlier forecast, and even further above the Fed’s 2% target range, is now that time?

Market Activity and Commodities

·      Equities – Stocks ended higher in October after dropping in September. Beginning at 3,585.62, the S&P 500 advanced 8% in October, closing at 3,871.98. The Dow, meanwhile, rose 14%%, gaining from 28,725.5 to 32,732.95, marking its best month since January 1976. Additionally, the Nasdaq increased 3.9% in October, closing at 10,988.15. Year to date, however, the S&P 500 is down over 18%, while the Dow fell 10%, and the Nasdaq dropped 30%.

·      Treasuries – Treasury yields rose in October after finishing higher in September. The 10-year Treasury yield rose 22bps from 3.83% to 4.05% in October after reaching a high of 4.24% on October 24. The 2-year Treasury yield, meanwhile, ended October up 21bps at 4.49%. Since the start of the year, the 2-year and 10-year are up 376bps and 254bps, respectively.

·      Oil & Gas            

o  (Oct 5) – OPEC + announced a production cut of 2 million barrels a day, double the initial proposal. The reduction in supply, however, had a relatively muted impact on crude prices as most analysts suggested the cut was already priced in and largely seen as a “drop in the bucket,” as one industry trader described it. The move, more importantly, could be a welcome support to Russia already facing reduced revenues as a result of ongoing conflict and recently imposed sanctions. Additionally, described the production cut as a shot at the Biden administration, which had been pushing Saudi Arabia, in particular, to increase supply in an effort to thwart rising energy prices in the U.S. According to National Security Advisor Jake Sullivan, “The President is disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin's invasion of Ukraine." Crude prices rose 17% since the start of the year to $87.76 a barrel.

o  (Oct 11) – Crude prices rose as international tensions escalated amid a series of Russian attacks on civilian targets. Crude traded up around 0.30% over three days, but traded lower for the day, down 2.7% at $88.70 a barrel.

o  (Oct 20) – According to reports, oil sales from the U.S. Strategic Petroleum Reserve were extended into December after initially poised to end in November. Of course, to be fair, while the period for sales continues to be prolonged from the original end date initially indicated back in March of this year, at least the next 15M barrels are part of the original 180M barrel release authorized in the first quarter. According to the U.S. Energy Department, the Biden administration released 165M barrels form the Strategic Petroleum Reserve (SPR), accounting for roughly 29% of the initial reserve holding as of March of this year, leaving just 405M barrels for emergency measures, the lowest level since 1984. While a short-term fix, the release of 165M barrels has worked to bring down gasoline prices from a recent high of $5.02 on average reached in June to $3.70 on September 23. Of course, more recently, prices have reversed course moving back up to $3.84, as of October 19, underscoring the ongoing pressure consumers face filling up their car with higher priced fuel.

o  (Oct 25) – According to the International Energy Agency, amid Russia's war in Ukraine, and OPEC's recent decision to cut supply by 2M barrels per day, the world is in the midst of a global energy crisis, which could result in a global recession. Of course, it’s not necessarily the United States that will suffer the most from rising energy costs. With higher import fees and a weaker currency relative to the dollar, emerging markets in regions such as Africa, Asia and Lain America will suffer disproportionately. While many nations are for better or worse focused on climate goals, given the current environment, energy security may reemerge as the number one priority. With oil consumption expected to grow by a further 1.7M bpd in 2023, an insufficient global supply will likely result in ongoing volatility and lingering price pressures, complicating the outlook for global growth and closer to home, Federal Reserve policy aimed at reining in cost pressures. Crude prices, however, were down 0.41% at $84.23 a barrel following the report, however, still up 12% since the start of the year. Gasoline prices, meanwhile, were down from a recent peak of $5.02 a gallon on average in June of this year, currently at $3.78 a gallon. However, at $3.78, gasoline prices were also up 12% from this time last year.

o  (Oct 26) – Tensions remained between Saudi Arabia and the U.S. In the latest, Prince Abdulaziz bin Salman, the Kingdom's oil minister, accused “unnamed” countries of using their emergency oil reserves to "manipulate markets rather than helping with shortages of supply." Speaking at the Future Investment Initiative Forum, also known as Davos in the Desert, he said, "It is my profound duty to make it clear to the world that losing emergency stock may become painful in the months to come. Running out of capacity has a much dearer cost than what people can imagine." The remarks followed a series of back and forth between the Biden administration and Saudi officials. Back in July, the White House made a plea to Saudi Arabia to increase production. However, on September 5, OPEC+ instead announced a production cut of 100K bpd. Crude prices rose 0.98% to $86.18 a barrel.

National Growth and Outlook

• NFIB Small Business Optimism (Oct 11) – The NFIB Small Business Optimism Index unexpectedly rose from a reading of 91.8 to a reading of 92.1 in September, a four-month high. According to Bloomberg, the index was expected to decline to 91.6 in September.

·      Leading Index (Oct 20) – The Leading Index fell 0.4% in September, a tenth of a percentage point more than expected and following a flat reading in August.

• Chicago Fed National Activity Index (Oct 24) – The Chicago Fed National Activity Index remained at a reading of 0.10 in September for the second consecutive month. According to Bloomberg, the index was expected to decline to -0.10 in September. The Chicago Fed Index draws on 85 economic indicators; a reading below zero indicates below-trend growth in the national economy and a sign of easing pressures on future inflation. In September, 48 of the 85 monthly individual indicators made positive contributions, while 37 made negative contributions.
• GDP (Oct 27) – GDP rose 2.6% on an annualized basis in the third quarter, following a 0.6% drop in the second quarter. According to Bloomberg, activity July to September year was expected to rise 2.4%. In the details, personal consumption rose 1.4% in Q3, down from a 2.0% increase in Q2. Goods consumption, however, fell 1.2%, due to a 0.8% decline in durable goods consumption and a 1.4% drop in nondurable goods consumption. Services consumption, on the other hand, increased 2.8%, down from a 4.6% gain in Q2. Gross private investment, a gauge of business spending, dropped 8.5% in Q3, following a 14.1% drop in Q2. Fixed investment fell 4.9% in the third quarter, following a 5.0% decrease the quarter prior. Nonresidential investment, including office buildings and factories, rose 3.7%, due to a 10.8% rise in equipment investment, and a 6.9% gain in intellectual property investment. Structures investment, however, fell 15.3% in Q3. Additionally, residential investment plunged 26.4%, the largest decline since Q2 2020. On the trade side, exports rose 14.4%, while imports declined 6.9% following a 2.2% gain the quarter prior. Finally, government consumption rose 2.4%, following three consecutive quarters of decline. Federal spending rose 3.7%, nondefense spending increased 2.3%, state and local spending gained 1.7%, and national defense spending increased 4.7% in Q3. The PCE deflator, meanwhile, rose 4.1% in the third quarter, less than the 5.3% gain expected and down from the 4.7% gain in the second quarter.

Employment

• JOLTS (Oct 4) – The number of job openings, according to JOLTS, the Job Openings and Labor Turnover Survey, dropped from 11.2M to 10.0M in August, more than the expected decline to 11.1M and the lowest since June 2021.
• Jobless Claims
• (Oct 6) – Initial jobless claims unexpectedly rose 29k from 190k to 219k in the week ending October 1, a five-week high. Jobless claims were expected to rise to 203k, according to Bloomberg. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.35M to 1.36M in the week ending September 24, a two-week high.
• (Oct 20) – Initial jobless claims unexpectedly fell 12k from 226k to 214k in the week ending October 15, a three-week low. Jobless claims were expected to rise to 232k, according to Bloomberg. Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.36M to 1.39M in the week ending October 8, a five-week high.
• (Oct 27) – Initial jobless claims rose 3k from 214k to 217k in the week ending October 22, a two-week high. Jobless claims were expected to rise to 220k, according to Bloomberg. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.38M to 1.44M in the week ending October 15.
• Nonfarm Payrolls (Oct 7) – Nonfarm payrolls rose by 263k in September, surpassing the 255k gain expected, according to Bloomberg. August payrolls, however, were unrevised at a 315k increase, while July payrolls were revised higher from a 526k gain to a 537k rise. Thus, the overall change in nonfarm payrolls (September data + net revisions) was 274k. In the details, private payrolls rose by 288k in September, following a 275k gain in August. Goods-producing payrolls, meanwhile, rose 44k due to a 22k gain in manufacturing payrolls and a 19k rise in construction payrolls. Service producing payrolls rose by 244k in September, following a 240k gain in August. Education and health payrolls led the gain in service payrolls in September, rising 90k following a 75k rise the month prior. Leisure and hospitality payrolls rose 83k, business services payrolls gained 46k, thanks to a 27k increase in temporary help payrolls, and information payrolls rose 13k in September. Also, trade and transport payrolls increased 3k, despite a 1k decline in retail trade payrolls. On the other hand, financial payrolls declined by 8k, and government payrolls dropped 25k in September, the first monthly decline since June and following a 40k increase in August.
• Participation Rate (Oct 7) – The civilian labor force declined by 57k in September following a 786k rise in August. As a result, the labor force participation rate fell unexpectedly fell from 62.4% to 62.3% in September, a two-month low. According to Bloomberg, the participation rate was expected to remain at 62.4% for the second consecutive month.
• Unemployment Rate (Oct 7) – Household employment rose by 204k in September following a 442k rise the month prior. With a 57k decline in the labor force, the unemployment rate unexpectedly ticked down from 3.7% to 3.5% in September, regaining a five-decade low. According to the median forecast, the unemployment rate was expected to remain at 3.7% for the second consecutive month.
• Average Hourly Earnings (Oct 7) – Average hourly earnings rose 0.3% in September, as expected and following a similar increase in August. Year-over-year, wages rose 5.0% in September, down from the 5.2% gain in August.
• Average Weekly Hours (Oct 7) – The average workweek remained at 34.5 hours in September for the fourth consecutive month.

Consumer Activity and Confidence

• Vehicle Sales (Oct 1) – Total vehicle sales rose from 13.18m to 13.49m unit pace in September, in line with the rise to 13.50m expected and a five-month high. Over the past 12 months, vehicle sales rose 10.7%, following a 1.0% gain the month prior.
• Consumer Credit (Oct 7) – Consumer credit rose by $32.2b in August, more than the $25.00b rise expected and up from a $26.1b increase in July.
• Retail Sales (Oct 14) – Retail sales were flat in September, falling short of expectations, according to Bloomberg, and following a 0.4% increase the month prior. In the details, vehicle sales fell 0.4%, and gasoline stations sales dropped 1.4%. Excluding autos, sales rose 0.1%, and excluding autos and gas, sales rose 0.3%, suggesting more underlying strength than the lackluster headline indicates at first look. Additionally, food and beverage sales rose 0.5%, electronics sales gained 0.8% and apparel sales gained 0.5%. Health and personal care sales gained 0.5% in September.
• University of Michigan Consumer Sentiment (Oct 28) – The University of Michigan Consumer Sentiment Index unexpectedly rose slightly from 59.8 to 59.9 in the final October reading, a six-month high. According to Bloomberg, the index was expected to decline to 59.6 in the final print. In the details of the report, a gauge of current conditions was revised higher from 65.3 to 65.6, also a six-month high, while a gauge of future expectations was unrevised at a reading of 56.2 in the final October print.
• Consumer Confidence (Oct 25) – Consumer confidence, according to the Conference Board, dropped from 107.8 to a reading of 102.5 in October, more than the expected decline to 105.9, and a three-month low. In the details of the report, a gauge of current conditions plunged from 150.2 to 138.9, the lowest reading since April 2021, and future expectations slipped from 79.5 to 78.1 in October.
• Consumer Spending & Income (Oct 28) – Consumer spending rose 0.6% in September, more than the 0.4% gain expected according to Bloomberg, and following a similar rise in August. Personal income, meanwhile, rose 0.4% in September, as expected and also following a similar gain in August. Year-over-year, consumer spending increased 8.2% and personal income rose 5.2%. Adjusting for inflation, real consumer spending rose 0.3% for the second consecutive month, while real income was flat in September, down from a 0.2% gain in August. Over the past 12 months, real spending rose 1.9%, the weakest annual gain since February 2021, while real income fell 1.0%, the ninth consecutive month of decline.

Inflation

·      PPI (Oct 12) – The PPI rose 0.4% in September, more than the 0.2% rise expected and following a 0.2% decline in August. Year-over-year, producer prices rose 8.5% in September, slightly more than the 8.4% gain expected and down from the 8.7% increase in August. Food prices rose 1.2%, and energy prices increased 0.7% in September, following two consecutive months of decline. Excluding food and energy costs, the core PPI rose 0.3%, as expected, and following a similar gain in August. Year-over-year, the core PPI increased 7.2% in September, matching the 7.2% increase in August. Additionally, services costs rose 0.4%, due to a 0.1% rise in trade costs. Transportation and warehousing costs, however, fell 0.2%, the third consecutive month of decline.

• CPI (Oct 13) – The CPI surprised to the upside with a monthly increase of 0.4%, significantly more than the 0.2% rise anticipated, according to Bloomberg. Of course, even with the larger-than-expected gain in September, the annual pace of headline inflation slowed – minimally – from 8.3% to 8.2%. In the details, food prices rose 0.8% in September, following a similarly sized increase the month prior. Energy prices, meanwhile, fell 2.1%, the third consecutive month of cooling price pressures. Despite further reprieve in energy costs and some other notable categories, however, the monthly decline was not enough to offset rising prices elsewhere. Excluding energy costs, the CPI rose 0.6%, excluding food prices, the CPI rose 0.3%, and excluding food and energy costs, the core CPI rose 0.6% in September as it did in August. Year-over-year, the core CPI rose from 6.3% to 6.6%, reaching a new cycle peak. Services costs rose 0.8%, with housing prices rising 0.7% thanks to a 0.8% increase in the owners’ equivalent rent component. Recreation prices rose 0.1%, education and communication costs gained 0.1%, and other services and medical care costs jumped 0.3% and 0.8%, respectively, in September. On the weaker side, transportation costs fell 0.6% last month despite a 0.7% increase in the price of new vehicles, commodities prices slipped 0.3%, and apparel prices dropped 0.3% in September.
• PCE (Oct 28) – The PCE, the Fed’s preferred measure of inflation, rose 0.3% in September, as expected. Year-over-year, headline inflation increased 6.2%, following a similar rise in August and still near a four-decade high. Excluding food and energy, the core PCE rose 0.5% in September, also as expected. Year-over-year, core inflation increased 5.1%, up from the 4.9% annual increase last month. 

Manufacturing and Production Activity

• ISM Manufacturing (Oct 3) – The ISM Manufacturing Index declined from 52.8 to 50.9 in September, more than the expected decline to 52.0, according to Bloomberg and the lowest reading since May 2020. In the details of the report, new orders declined more than four points to 47.1, employment dropped from 54.2 to 48.7, back into contractionary territory (a reading below 50), and prices paid decreased from 52.5 to 51.7, the lowest reading since June 2020. Additionally, supplier deliveries inched lower from 55.1 to 52.4, and new export orders dropped from 49.4 to 47.8. On the other hand, production rose from 50.4 to 50.6, imports increased from 52.5 to 52.6, and inventories gained from 53.1 to 55.5, a two-month high.
• ISM Services (Oct 6) – The ISM Services Index declined from 56.9 to 56.7 in September, less than the expected decline to 56.0, albeit a two-month low. In the details of the report, employment rose from 50.2 to 53.0, a six-month high. On the other hand, prices paid dropped 2.8 points to 68.7, backlog of orders declined from 53.9 to 52.5, new orders decreased 1.2 points to 60.6, and supplier deliveries fell from 54.5 to 53.9 in September, the lowest reading since February 2020.
• Empire Manufacturing (Oct 17) – The Empire Manufacturing Index declined from -1.5 to -9.1 in October, more than the expected decline to -4.3 and the third consecutive month of decline. In the details of the report, new orders pointed to modest growth at a reading of 3.7, unchanged from the prior month, shipments dropped by about 20 points to -0.3, and factory employment pointed to a moderate increase in headcount at a reading of 7.7 in October. Additionally, looking ahead, the index for future business conditions fell 10 points to -1.8, the second weakest level since 2009, with about 36% of respondents reporting that they expect general business conditions to weaken in the next six months.
• Industrial Production (Oct 18) – Industrial production rose 0.4% in September, surpassing the 0.1% rise expected and the largest monthly gain in two months.
• Capacity Utilization (Oct 18) – Capacity utilization unexpectedly increased from 80.1% to 80.3% in September. According to Bloomberg, capacity utilization was expected to decline slightly to 80.0%.
• Philly Fed Business Outlook Survey (Oct 20) – The Philly Fed Index rose slightly from -9.9 to -8.7 in October, a two-month high. According to Bloomberg, the index was expected to rise to -5.0. In the details of the report, prices paid rose from 29.8 to 36.3, new orders increased from -17.6 to -15.9, and delivery time gained from -18.2 to -12.6 in October. Additionally, employment improved from 12.0 to 28.5, the highest reading since April. On the other hand, shipments fell to 8.6 from 8.8, and the six-month outlook dropped from -3.9 to -14.9 in October, the lowest since July.
• Richmond Fed Manufacturing (Oct 25) – The Richmond Fed Index decreased ten points to -10 in October, double the decline to -5 expected and the lowest reading since May 2020. In the details of the report, shipments fell from 14 to -3, new order volume declined from -11 to -22 and order backlogs slipped three points to -28, the seventh consecutive month of a negative print. On the other hand, inventory levels of finished goods rose six points to a reading of -2, and inventory levels of raw goods increased from 4 to 20 in October.
• Kansas City Fed Manufacturing (Oct 27) – The Kansas City Fed Index dropped from a reading of 1 to -7 in October, the lowest reading since May 2020. According to Bloomberg, the index was expected to fall to a reading of -2. In the details of the report, the volume of new orders declined from -16 to -11, and prices paid decreased from 41 to 26, and the number of employees fell seven points to a reading of 3. The six-month ahead index, meanwhile, declined from 9 to a reading of -1 in October.
• Durable Goods (Oct 27) – Durable goods rose 0.4% in September, less than the 0.6% increase expected and following a 0.2% rise in August. Year-over-year, headline orders rose 11.5% in September, up from the 11.3% annual increase the month prior. Transportation orders rose 2.1%, following a 0.6% gain the month prior, due to a 21.9% rise in civilian aircraft orders, and a 2.2% increase in vehicle and parts orders. Excluding transportation, durable goods orders fell 0.5% in September and increased 4.6% over the past 12 months. In other details, computers and electronics orders as well as machinery orders both fell 0.4%, primary metals orders dropped 1.7%, and electrical equipment orders decreased 1.3% offsetting a 1.3% gain the month prior. Also, fabricated metals orders fell 0.4%, the second consecutive month of decline.
• Capital Goods (Oct 27) – Capital goods orders increased 3.5%, following a 1.1% decline in August. Capital goods orders excluding aircraft and defense – a proxy for business investment – fell 0.7% in September, the largest monthly drop since May 2021, and following a 0.8% increase in August. Year-over-year, business investment increased 7.6%.
• Dallas Fed Index (Oct 31) – The Dallas Fed Manufacturing Activity Index dropped from -17.2 to -19.4 in October, more than the expected decline to -17.4 and the sixth consecutive month of decline. In the details of the report, production declined from 9.3 to 6.0, capacity utilization decreased from 13.4 to 6.0, and new orders dropped from -6.4 to -8.8, averaging -5.5 over the past six months. Additionally, shipments plunged from +7.1 to -1.6. On the other hand, employment rose from 15.0 to 17.1, a three-month high, and the six-month general business outlook index ticked up slightly from -22.4 to -21.2 in October.
• Chicago PMI (Oct 31) – The Chicago PMI unexpectedly fell from 45.7 to a reading of 45.2 in October, the lowest reading since June 2020. According to Bloomberg, the index was expected to rise to 47.0 in October. In the details of the report, prices paid, inventories and supplier deliveries rose, signaling expansion, while new orders, employment and production fell, signaling contraction.

Housing Market Activity

• Construction Spending (Oct 3) – Construction spending fell 0.7% in August, more than the 0.3% decline expected and the largest monthly drop since February 2021. Over the past 12 months, construction spending rose 8.5% in August, down from the 9.5% increase in July.
• NAHB Housing Market Index (Sep 19) – The NAHB Housing Market Index continued its retreat in the latest October reading, falling now for ten consecutive months from 46 to a reading of 38, the lowest reading since May 2020.
• Building Permits (Oct 19) – Building permits rose 1.4% in September, pulling the annual pace up from 1.542M to 1.564M, a two-month high. Building permits were expected to decline 0.8%, according to Bloomberg. Single family permits fell 3.1%, while multi-family permits rose 7.8%. Year-over-year, building permits declined 3.2% in September following a 13% drop in August.
• Housing Starts (Oct 19) – Housing starts dropped 8.1% in September, pulling the annual pace down from 1.566M to 1.439M, a two-month low. Starts were expected to fall 7.2%, according to the median forecast on Bloomberg. Single family starts fell 4.7%, and multi-family starts dropped 13.2%. Year-over-year, housing starts fell 7.7% in September, the fifth consecutive month of decline. On a regional basis, starts fell in three of the four regions of the country in September. Starts declined 12.5% in the Northeast, 2.7% in the Midwest and 13.7% in the South. However, starts rose 4.5% in the West.
• Existing Home Sales (Oct 20) – Existing home sales declined for the eighth consecutive month, falling 1.5% from 4.78M to a 4.71M unit pace, the lowest since May 2020. According to the median estimate on Bloomberg, existing home sales were expected to drop 2.1%. In the details of the report, single-family sales fell 0.9%, and multi-family sales dropped 5.8%. Year-over-year, existing home sales declined 23.8% in September, the fourteenth consecutive month of decline. Despite a decline in sales, the months’ supply of existing homes remained at 3.2 months for the third consecutive month, averaging 3.2 months over the past three months. From a price standpoint, the median cost of a previously owned home rose 8.4% in September from a year earlier to $385k, a six-month low.
• S&P/CS 20 City Index (Oct 25) – The S&P Case-Shiller 20 City Home Price Index dropped 1.32% in August, more than the 0.80% drop expected and the largest monthly decline since March 2009. Over the past 12 months, the 20-city index rose 13.08%, the smallest gain since February 2021 and down from the 16.01% increase the month prior. On a national level, home prices fell 0.86% in August and rose 12.99%, also the smallest gain since February 2021 and down from the 15.62% rise in July.
• New Home Sales (Oct 26) – New home sales fell 10.9% in September from 677k to 603k, a two-month low. New home sales were expected to drop 15.3% in September, according to the median estimate on Bloomberg. Year-over-year, sales fell 17.6%, the seventh consecutive month decline. Due to a fall in sales, the months’ supply of new homes rose from 8.1 months to 9.2 months. From a price standpoint, the median cost of a newly constructed home rose 8.0% from the month prior to $471k. Year-over-year, however, new home prices increased 13.9%.
• Pending Home Sales (Oct 28) – Pending home sales plunged 10.2% in September, more than the 4.0% decline expected and following a 1.9% decrease in August. Over the past 12 months, pending home sale fell 30.4%, the tenth consecutive month of decline.

Trade and Currency

• British Pound
• (Oct 3) – The pound rallied on the news that controversial tax cuts and spending initiatives from new U.K. Prime Minister Liz Truss and her administration had been scrapped, as backlash over the measures spread. Recall, in power for less than a month, the new U.K. Prime Minister Liz Truss and her administration announced a sweeping proposal of tax cuts and spending initiatives aimed at subsidizing energy costs and more broadly providing further fiscal support deemed necessary to assist those facing ongoing hardship. The plan, however, many feared would serve to exacerbate inflationary conditions already at a four-decade high. The pound climbed 0.66% to $1.12.
• Trade (Oct 6) – The U.S. trade deficit narrowed for the fifth consecutive month by $3.1b to $67.4b in August, the smallest in more than a year. According to Bloomberg, the deficit was expected to narrow to $67.7b. In the details of the report, the value of goods and services imports fell 1.1% in August to $326.3b, while exports eased 0.3% to $258.9b. 
• Import & Export Prices (Oct 15) – Import prices fell 1.2% in September, a tenth of a percentage point more than expected and following a 1.1% drop in August. Export prices, meanwhile, declined 0.8% in September, less than the 1.0% fall expected and following a 1.7% drop the month prior. Over the past 12 months, however, import prices rose 6.0% and export prices increased 9.5%.

 Monetary Policy, Reports, and Commentary

• Atlanta Fed GDPNow Forecast

o  (Oct 28) – Following a stronger-than-expected 2.6% rise in Q3 GDP, the Atlanta Fed’s GDPNow preliminary forecast for Q4 GDP is 3.1%.  

• Fed Speak/News
• (Oct 4) – Speaking at the 2022 U.S. Hispanic Chamber of Commerce National Conference, New York Fed President John Williams noted the difficult scenario the Fed faces given the inorganic nature of inflation stemming from supply-side limitations as well as more robust demand. According to Williams, as such, it may take years to get inflation under control with the many layers of price increases he compared to an onion. “Clearly, inflation is far too high, and persistently high inflation undermines the ability of our economy to perform at its full potential…The outer layer consist of prices of globally traded commodities such as lumber, steel, grains, and oil.”
• (Oct 4) – In its annual report on the global economic outlook, the UN Conference on Trade and Development called on the Fed to stop raising interest rates, warning rapid rate hikes pose a significant risk to developing countries. While the report notes that every 1% increase in the federal funds rate cuts growth in rich countries by 0.5% and in poor countries by 0.8% over the next three year period, such consequences are not enough to deter the Fed, at least according to Fed Chairman Powell. Speaking at the press conference following the September rate decision, Powell responded that while the Committee is aware of the global consequences, with inflation still a sizable threat in the U.S., the primary focus of the Fed must remain reinstating price stability in the domestic market. “Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy,” Powell said. 
• (Oct 5) – Fed Governor Philip Jefferson took the stage at an Atlanta Fed Conference. Like his counterparts, Jefferson warned that the Fed is not yet done raising rates, warning of still too-high inflation and a risk of a wage-price spiral, a phenomenon whereby higher prices lead to higher wages that in turn lead to higher wages and so on. Jefferson is extremely new to the board, appointed as of May, thus his comments were expectedly in line with the broader consensus at the Fed. As the November meeting approaches, however, and weakness persists, an increasingly fruitful conversation as to the future pathway for policy would be expected, at least from the more seasoned members of the Committee. 
• (Oct 5) – Speaking at Northwestern University’s Institute for Policy Research, Atlanta Fed President Raphael Bostic said, “I would like to reach a point where policy is moderately restrictive – between 4 and 4 ½ percent by the end of this year – and then hold at that level and see how the economy and prices react.”
• (Oct 11) – Speaking at a National Association for Business Economics (NABE) Conference, Fed Vice Chair Lael Brainard said she is paying close attention to the outlook and risks as the Fed continues to raise rates. “We are starting to see the effects in some areas, but it will take some time for the cumulative tightening to transmit throughout the economy and to bring inflation down. Uncertainty remains high, and I am paying close attention to the evolution of the outlook as well as global risks,” she said.
• (Oct 11) – Also speaking at the NABE event, Chicago Fed President Charles Evans said, rates will need to remain at higher levels, but he also cautioned about raising rates too much. "Overshooting is costly, too, and there is great uncertainty about how restrictive policy must actually become…This puts a premium on the strategy of getting to a place where policy can plan to rest and evaluate data and developments."
• (Oct 12) – Speaking to the Economic Club of New York, Cleveland Fed Presided Loretta Mester redirected the market’s focus back to the Fed’s primary directive of price control, noting Fed officials need to take decisive action to bring down prices: “Being cautious does not mean doing less,” she said. “Instead, it means being very careful to not allow wishful thinking to substitute for compelling evidence, leading one to prematurely declare victory over inflation and pause or reverse rate increases too soon.”
• (Oct 19) – Minneapolis Fed President Neel Kashkari cautioned that the Fed may not be able to pause rate hikes even at 4.75% should inflation remain elevated. Speaking in a discussion on the economy at a Women Corporate Directors Minnesota Chapter event, Kashkari said, “If we don’t see progress in underlying inflation, or core inflation, I don’t see why I would advocate stopping at 4.5, or 4.75, or something like that.” “Core services inflation,” he added, “which is the stickiest of all, keeps climbing, and we keep getting surprised on the upside.”
• (Oct 20) – Federal Reserve Bank of St. Louis President James Bullard said the Fed will not be deterred by declines in the stock market nor is he concerned about financial strains in the economy. In fact, he said, it’s “good news” that the market continues to anticipate further aggressive action from the Committee and thus, it’s paramount the Fed follows through with additional rate hikes. Speaking to Bloomberg TV, he said, “It is a great time to be fighting inflation and it is a great time to try to nip inflation in the bud...while the labor market is strong,”
• (Oct 24) – While current Fed officials entered a blackout period ahead of the November 2 policy announcement, former New York Fed President Bill Dudley offered his assessment of the Powell Fed. Writing in a Bloomberg Opinion piece, Dudley said Powell appears to be emphasizing hope over action in his efforts to tame inflation. Pointing to a forecast of 4.75% for federal funds by year-end, Dudley said the Committee is potentially woefully underestimating or underappreciating the level of rates needed to tame prices. “There’s no free lunch. To increase its chances of getting inflation back down to 2%, the Fed has to be willing to push short-term interest rates higher when the economy doesn’t slow sufficiently and the labor market remains too tight. That increases the likelihood of recession. Volcker did what was necessary and beat inflation. Burns didn’t, and failed. How does Powell want to be remembered?”

Domestic News and Activity 

• Politics and the Biden Administration
• (Oct 5) – According to the Mortgage Bankers Association, the average contract rate on a 30-year fixed-rate loan rose to a 16-year high pushing to roughly 6.75%. With rates up more than 300bps since the start of the year, a rapidly higher cost of borrowing is resulting in the worst slump in home loan applications since the pandemic. Housing was a significant bright spot to the economy, but now remains a sizable headwind.
• (Oct 6) – According to a Bankrate survey, more than 80% of holiday shoppers say they plan to or are already implementing measures to reduce the cost of their purchases this season. While seemingly resilient at the start of the year with a 2.7% rise in retail sales, since then, the trend pace has slowed markedly. In fact, not only has weakness continued, but it has intensified more recently with sales slipping into outright negative territory in July before rebounding minimally in the latest August report, up 0.3%.
• (Oct 6) – According to Treasury Department, the country’s national debt level has topped $31T, a new record high and a 27% increase over the past five years.

International News and Activity 

• Europe
• (Oct 5) – The latest data from Europe suggested the downturn abroad may not only be continuing but intensifying, complicating the outlook for the European Central Bank (ECB) struggling to control inflation while avoiding a significant downturn in the region. The latest September Composite PMI slowed from 48.9 to 48.1, a 20-month low and the third consecutive month in contractionary territory (a reading below 50).
• (Oct 27) – The European Central Bank (ECB) raised rates by 75bps, lifting the deposit rate from 0.75% to 1.50%, the highest since 2008. Recall, the ECB initiated rate hikes in July. Inflation in the region, however, has already surged past 10%, compounding pressure on policy makers to continue to take strong action against price pressures despite increased evidence of mounting weakness in the economy. Aside from raising rates, the central bank is also actively discussing ways to reduce its balance sheet holdings, which have grown to €8.8T, or roughly 70% of Eurozone economy. According to the statement, "In view of the unexpected and extraordinary rise in inflation, it (TLTRO) needs to be recalibrated to ensure that it is consistent with the broader monetary policy normalisation process and to reinforce the transmission of policy rate increases to bank lending conditions.”
•  The U.K.

o  (Oct 3) – Tens of thousands of transportation workers in the U.K. went on strike leaving the country with a mostly inoperable railway. Citing a rising cost of living, and insufficient wage growth, postal workers, nurses, teachers and public defense lawyers also threatened similar action.

o  (Oct 14) – Amid mounting pressure and growing questions of affordability, UK Prime Minister Liz Truss walked back some of her earlier proposed economic initiatives. An “expansive strategy,” the premier’s plan was centered on a price cap on gas, as well as a combined expenditure of £130 billion over the next 18 months to cap household energy bills and lower energy bills for businesses.

o  (Oct 25) – Liz Truss departed after only 45 days at 10 Downing Street. Rishi Sunak was elected as the leader of the Tory party in the U.K. and became the country’s third prime minister in two months. Contrary to the prior administration’s proposed plan to cut taxes and increase spending, Sunak is expected to prioritize fiscal conservatism and reduce government spending with potentially sizable cuts. Aside from government finances, the new PM will also need to contend with a number of issues facing the country including a rapidly growing deficit, immigration, as well as the U.K and EU’s tenuous relationship.

·      China

o  (Oct 17) – In a two-hour speech at the National Congress of the Communist Party of China, China President Xi Jinping reiterated the importance of his policies and the anticipated positive economic impact of such policies going forward. Xi, for example, projected the level of a "medium-developed country" in a "giant new leap" by 2035. He also reiterated a continuation of the country’s Zero Covid policy. “In responding to the sudden attack of COVID-19, we put the people and their lives above all else and tenaciously pursued a dynamic Zero COVID policy. We have protected the people's health and safety to the greatest extent possible and made tremendously encouraging achievements in both epidemic response and economic and social development.”

o  (Oct 24) – Xi Jinping was confirmed for a third five-year term as leader of the ruling Communist Party in China, as expected, suggesting a continuation of current policies aimed at “modernizing” the country and deterring “separatists.” Xi has also been clear that a continuation of the country’s Zero-Covid policy is necessary to protect the greater good of the populace. Chinese GDP reportedly rose 3.9% in Q3. While well above expectations of 3.4%, it falls significantly below China's official full-year target of 5.5%, which in itself is the weakest goal in thirty years. Weakened by a housing market slump and sluggish consumer activity, the Chinese economy has struggled to regain momentum in the post-Covid era.

·      Canada

o  (Oct 26) – The Bank of Canada (BOC) raised rates for the sixth time in eight months. The BOC surprised the market with a 50bp hike instead of a 75bp hike, bringing the key lending rate up from 3.25% to 3.75%.

·      Japan

o  (Oct 28) – The Bank of Japan, as expected, left its policy unchanged with its key lending rate at -0.10% as it has been since 2016. Coupled with the latest policy announcement, PM Fumio Kishida also announced a ¥71.6 trillion ($490 billion) stimulus package including private contributions and other fiscal measures. The package is aimed at easing the impact of rising prices as well as boosting growth by reducing energy costs, with the package estimated to save the average household about 45,000 yen next year. Japanese inflation rose 3% in September following a similar gain in August and marking an eight-year high. GDP in the country, meanwhile, rose 3.5% in the second quarter, up from the 0.2% gain in the first quarter and a two-quarter high. Thus, the combination of relatively lower prices and stronger growth compared to much of the developed world has afforded the BOJ increased flexibility other central banks are not able to enjoy.

-Lindsey Piegza, Ph.D., Chief Economist