Good Thursday AM,

Yesterday was a good day in the markets.

Finally, when the Fed spoke, it didn’t hurt. As a result, the bear steepening inverted yield curve we have been dealing with for more than a year, has now all but flattened. It sounds super positive and from a long-term outlook it will be. The thing to know is that when the yield curve inverts it is a precursor of a coming recession (a warning signal) which takes about 18 months to materialize however, when the curve un-inverts, well, a recession tends to be on the horizon in the upcoming quarters.

That’s where we are headed now.

I had hoped as a close friend of mine espoused that this time could be different as the long end of the curve seemed to be the one closing the gap but that is not the case. Short term yields are falling faster than long term yields (watch out for those big returns on money markets and sort term bonds, they could also fall quickly). The news today was also bond friendly. Higher unemployment claims, higher non-farm productivity, and unit labor costs dropped off a cliff. The 10yr yield has dropped to 4.68%. if we can break below 4.60%. we bring in 4.45% which would improve rates by another .25%. Making some real progress here but it all depends on one more bullet to dodge, tomorrow’s jobs report which is the biggest economic release of the month. Despite last month’s being a monster number, the bar is not set high with expectations for 185k jobs tomorrow. While I think the report will be benign, it is tough to float into such an important release. We have had some nice gains and it would be worth locking those in for your customers.

More on yesterday’s news from the Fed…

Federal Reserve Chair Jerome Powell hinted the central bank might be done raising interest rates for now but was careful not to rule out another increase after officials extended a pause in hikes. Officials voted unanimously on Wednesday to leave rates unchanged at a 22-year high Federal Reserve Chair Jerome Powell hinted the US central bank may now be finished with the most aggressive tightening cycle in four decades, a dovish pivot that has been cheered by global markets. “The question we’re asking is: Should we hike more?” Powell told reporters yesterday after the Fed held off on raising interest rates for a second consecutive policy meeting. “Slowing down is giving us, I think, a better sense of how much more we need to do, if we need to do more.” There were a couple of key questions worth mentioning. First there was one about whether the Fed staff in preparation for the meeting were forecasting a recession. And Powell reluctantly said that the answer was no.

There was also an interesting question about UMich inflation expectations (which ticked up in the latest reading) and whether that was worrisome. During the aggressive part of the tightening cycle, inflation expectations in the surveys were cited as a reason. This time Powell kind of downplayed UMich. So that might tell you something about where his head is at in terms of risks. Also on the macro front yesterday we got ISM Manufacturing. It was not great. The headline reading came in at 46.7, which was well below the 49.0 that was expected. The employment sub-index also dropped sharply, from 51.2 to 46.8. Also in the anecdotal commentary part, there were many firms that talked about economic slowing. And none of the comments had anything to do with challenges hiring.

The economy is slowing, and everyone feels it.

One reason the Fed might not have to raise rates?

A supply-side boom. Supply chains have normalized and the labor force has expanded in recent quarters, allowing both brisk economic growth and falling inflation. There is, however, no guarantee the boom will continue.

The Fed didn’t get much clarity from the round of economic data released Wednesday.

The Labor Department said job openings rose in September and remain well above the number of people who are out of work and looking for a job. But the pace of hiring has eased and the great resignation has become the steady situation: Layoffs are historically low and the rate at which workers are quitting their jobs has leveled off at its prepandemic level.

A gauge of factory activity fell to its lowest level since July.

The Institute for Supply Management’s purchasing managers index dropped to 46.7 in October from 49 in September. A reading below 50 indicates activity is contracting. “Amid a complacency around recession warning alarms, the ISM manufacturing index is flashing red,” said Wells Fargo economist Tim Quinlan.

That’s enough for now. More tomorrow.

Please remain safe and healthy, make today great!