Financial News for the Week of November 3rd, 2023

The U.S. economic calendar was packed this week with a mix of key data, central bank meetings and even Treasury auction announcements. To start things off, the Treasury announced its financing requirements for the upcoming quarter. In the announcement, issuance is dominated by shorter dated securities (2-7 year), with planned 10-to-30-year range issuance less than most had expected. What’s more, Treasury’s projection that it will slow the recent flood of new long-dated debt, contributed to a rally in the bond market and a pullback in long-term yields.

The next key focus was the labor market, with varying reports giving snapshots of the state of this important sector. November’s nonfarm payrolls, the most important, showed that hiring in the U.S. economy has slowed. Additionally, the pace of wage growth has cooled (Chart 1) in financial news. The unemployment rate also edged up slightly, bucking expectations for no change. The job opening and labor turnover survey (JOLTS) was slightly backward looking, covering September, and showed an increase in job openings, which was offset by a rise in the number unemployed, leaving the ratio of the two largely unchanged at 1.5. The pace of hiring also eased and the quit rate levelled off at its pre-pandemic rate. The employment cost index on the other hand showed that wage gains ticked up in the third quarter, but compensation growth still slowed from 4.5% to 4.3% on a year-on-year basis. Overall, the labor market metrics are consistent with what the Fed wants to see – a market that is slowly cooling with likely further deceleration in wage pressures ahead.

As widely expected, the Federal Reserve held interest rates steady at 5.25%-5.50% on Wednesday. This is the first time in the current tightening cycle that the Fed has paused for two consecutive meetings. However, the central bank still left the door wide open to potentially raising rates in the future if needed to keep the disinflation momentum going. October’s cooling in the labor market combined with expectations that economic activity will pullback in Q4, suggests that they may not need to walk through it before the year is done, but only time (and the data) will tell.

One sector of the economy that is not fairing very well is the manufacturing sector. Activity in the sector, as measured by the ISM sentiment survey, continued to contract in October, falling to its lowest level since July, on broad-based weakness. The silver lining, however, is that a pullback in raw materials prices is easing cost pressures, which should help to mitigate price pressures for consumer goods. The services side of the economy fared a bit better, with the ISM services index expanding again in October, though at a slower pace (Chart 2). Twelve out of eighteen industries reported growth; however, the softer-than-expected reading suggests that the Fed’s hiking campaign is influencing the services sector as well.

The takeaway from the week is that if the disinflationary trend remains intact, the Fed’s December decision is a tougher call. There will be several economic releases over the next six weeks that will influence the Fed’s decision. But, so far, consumer spending momentum has remained stronger than expected, risking an uptick in inflation. This still suggests that the Fed’s work is likely not done.

 

Shernette McLeod, Economist | 416-415-0413