"Slower, Higher, Stronger"

MONETARY

• Pursuant to the Federal Reserve’s November FOMC meeting, the Fed raised its Federal Funds Target Rate Range by 75bps to a new level of 3.75-4.00%. The Federal Reserve also reiterated its commitment to maintain price stability through restrictive policy measures¹
  • Additionally, the Fed noted that financial conditions have already become tighter as a result of its policy actions¹
    • (Powell) “Financial conditions have tightened significantly in response to our policy actions, and we are seeing the effects on demand in the most interest-rate-sensitive sectors of the economy, such as housing. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation”¹
  • Speaking on the future pacing of rate hikes, as well as the expected terminal rate, Chairman Powell noted that a slower pace of hikes would likely be appropriate, and that there is uncertainty around how much higher rates will need to go¹
    • (Powell) “At some point, as I’ve said in the last 2 press conferences, it will become appropriate to slow the pace of increases, as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2 percent goal. There is significant uncertainty around that level of interest rates.”¹
  • Chairman Powell also spoke on how the current outlook differs from the Global Financial Crisis era when analyzing financial system stability and housing¹
    • (Powell) “From a financial stability standpoint, we didn’t see in this cycle the kinds of poor credit underwriting that we saw before the global financial courses. Housing credit was very carefully, much more carefully managed by the lenders so it’s a very different situation and doesn’t present potential financial, doesn’t appear to present financial stability issues.”¹
  • Regarding the state of the Labor Markets and the current state of the consumer¹
    • (Powell) “…the labor market is very, very strong. Very strong. And household by, of course have strong balance sheets. So, we go into this with a strong labor market and excess demand in the labor market, as you can see through many different things and also with households who have strong spending power built up.”¹
• In the Federal Reserve’s most recent Beige Book publication, it was noted that overall economic activity was seen as having rose modestly since the last report, which included a larger than average degree of variance among the Reporting Districts²
  • Slowing Demand in the more interest rate-sensitive areas of the economy was attributed to higher interest rates, inflation, and supply disruptions²
  • Travel and tourist activity rose strongly, boosted by continued strength in leisure activity and a pickup in business travel, an observation not indicative of recessionary environments²
  • Rising mortgage rates and elevated house prices further weakened single-family starts and sales, but contributed to elevated apartment leasing and rents, which generally remained high²
    • Bankers in most reporting Districts cited declines in loan volumes, partly a result of shrinking residential real estate lending²
    • Supply Chains continue to show improvement as activity in transportation services was mixed, and port activity increased strongly, but reports of trucking and freight demand were mixed²
  • Overall labor market conditions remained tight, though half of Districts noted some easing of hiring and/or retention difficulties. Competition for workers has led to some labor poaching by competitors or competing industries able to offer higher pay. Wage growth remained widespread²

 

FISCAL

• In response to continued releases of petroleum from the United State’s Strategic Petroleum Reserve, President Joe Biden announces that the U.S. will begin refilling its stockpile when oil prices reach around $70/barrel⁵
  • President Joe Biden has also stated that the United States is ready to utilize further releases from the SPR early next year to combat higher fuel costs⁵
  • Since the initial releases of oil from the SPR, nearly 40% of the SPR has been depleted so far⁵
  • Additional releases from the SPR were announced in response to OPEC production cuts which went in stark contrast to the Biden Administration’s requests for supply expansion⁵

 

GEOPOLITICS

• Chinese authorities push back on rumors of an end to China’s Zero-COVID Policy³
  • Hu Xiang, an official at the National Health Commission’s disease prevention and control bureau stated, “Previous practices have proved that our prevention and control plans and a series of strategic measures are completely correct”³
  • News of the potential end, or loosening, of China’s Zero-COVID Policy bolstered investor sentiment on the rumor³
  • In response to the continued affirmation of China’s Zero-COVID Policy, some companies have lowered guidance for productivity in the region. Apple was among the most affected companies, lowering its expectations for iPhone 14 shipments on the news³
  • Some estimates have China loosening its Zero-COVID Policy restrictions around Q2 2023, however much uncertainty remains as to timing³
• The U.S. Department of Defense authorizes an additional $400M of aid to Ukraine⁴
  • A list of items included in the aid is as follows:⁴
    • Funding to refurbish HAWK air defense missiles for inclusion in future Presidential Drawdown packages⁴
    • 45 Refurbished T-72B Tanks with advanced optics, communications, and armor packages⁴
    • 1,100 Phoenix Ghost Tactical Unmanned Aerial Systems⁴
    • 40 Armored Riverine Boats⁴
    • Funding to refurbish 250 M1117 Armored Security Vehicles⁴
    • Tactical secure communications systems and surveillance systems⁴
    • Funding for training, maintenance, and sustainment⁴
  • Total U.S. aid that has been sent to Ukraine since Russia’s invasion now stands at over $18.9B⁴

 

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

 

ANNOTATIONS

1. The Federal Reserve. “Transcript of Chair Powell’s Press Conference”. November 2, 2022.
2. The Federal Reserve. “The Beige Boo: Summary of Commentary on Current Economic Conditions. October 19, 2022.
3. Bloomberg. “China Markets Set for More Volatility as Covid-Zero Stays”. November 6, 2022.
4. U.S. Department of Defense. “$400 Million in Additional Security Assistance for Ukraine”. November 4, 2022.
5. Reuters. “U.S. sells last batch of emergency reserve oil from historic release”. November 3, 2022.