Spector of War Haunts Once More

MONETARY

• In another well telegraphed move, the Federal Reserve opts to leave its Target Federal Funds Rate unchanged at the current level of 525-550bps. Chairman Jerome Powell also commented on a wide variety of relevant economic factors driving the current state of the U.S. Economy²
  • Powell noted that recent economic data has come in well above expectations, and that the U.S. Economy remains in a state of continued strong growth on the back of strong consumer spending²
    • (Powell) “Recent indicators suggest that economic activity has been expanding at a strong pace and well above earlier expectations. In the third quarter, real GDP is estimated to have risen an outsized annual rate of 4.9 percent, boosted by a surge in consumer spending.”²
  • Moving forward, Chairman Powell made reference to the notion that tighter financial conditions, as defined by higher longer term interest rates, could potentially have the ability to reduce the need for future interest rate hikes provided those moves were persistent²
    • (Powell) “Financial conditions have tightened significantly in recent months, driven by higher longer-term bond yields among other factors. Because persistent changes in financial conditions can have implications for the path of monetary policy, we monitor financial developments closely.”²
    • (Powell) “The first is that the tighter conditions would need to be persistent. And that is something that remains to be seen. But that’s critical. You know, things are fluctuating back and forth. That’s not what we’re looking for. With financial conditions, we’re looking for persistent changes that are material.”²
  • Regarding the labor market, Chairman Powell noted that conditions remain favorable to workers as labor demand still exceeds supply, a primary driver of continued wage growth for workers²
    • (Powell) “Nominal wage growth has shown some signs of easing and job vacancies have declined so far this year. Although the jobs-to-workers gap has narrowed, labor demand still exceeds the supply of available workers.”²
  • On the topic of the outbreak of war in the Middle East, Chairman Powell noted that Oil Prices have not reacted in a manner that would produce significant inflationary effects as of yet. Additionally, it was noted that the overall macroeconomic effects of that conflict are still uncertain²
    • (Powell) “The price of oil has really not reacted very much so far to this. You know, as the Fed, as the Federal Open Market Committee, our job is really to talk about, to understand the economy and the economic effects. And it isn’t clear at this point that the conflict in the Middle East is going to—is on track to have significant economic effects.”²
  • The Fed has observed that Inflationary pressures have come down since last year on the basis of tighter financial conditions, as well as easing of previously problematic supply and demand imbalances. Nevertheless, Chairman Powell continues to note that more progress is needed to sustainably bring Inflation back down to the Fed’s target of roughly 2.0%²
    • (Powell) “Inflation has moderated since the middle of last year, and readings over the summer were quite favorable. But a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal. The process of getting inflation sustainably down to 2 percent has a long way to go. Despite elevated inflation, longer-term inflation expectations appear to remain well anchored”²

FISCAL

• Newly elected Speaker of the House Mike Johnson (R-LA) seeking to negotiate a stopgap measure that would avert a government shutdown on November 17 and fund the government, on a temporary basis, through roughly mid-January or mid-April¹
  • A stopgap measure would allow Congress more time to come to a consensus agreement on the 12 separate appropriations bills¹
    • Speaker Mike Johnson has floated the idea that any short-term stopgap measure would need to come with certain, unspecified conditions¹
      • (Johnson R-LA) “I think they’ll be conditions the American people can live with and a consensus we can build around here in the House”¹
  • Some members of Congress are supporting a one year extension of current spending levels; however, due to a law enacted on June 3, 2023 any one year extension of current levels would automatically trigger a 1% reduction in spending in all categories across the board¹
  • Some noteworthy areas of anticipated negotiation difficulties include:¹
    • Further financial and military aid to Ukraine¹
    • Financial and military aid to Israel¹
    • Financial aid and support into Gaza/West Bank¹
    • Increasing the budget for U.S./Mexico border protection¹

GEOPOLITICS

• After a roughly 3-week period of heavy bombing, Israel’s forces commence a ground invasion of the Gaza Strip⁴
  • The IDF’s focus is believed to largely be confined to the northern part of the Gaza Strip, which is believed to be a stronghold area for Hamas personnel⁴
    • Although the northern area of the Gaza Strip is where focus is believed to be, an IDF spokesperson says that Israeli forces are attacking all territories within Gaza⁴
  • International concerns for an escalation of the conflict still persist, as fears over Iran’s involvement in the conflict may have the effect of constraining worldwide oil supplies, potentially putting pressure on energy prices⁴
    • These fears have largely been ignored by the market, and have also been relatively downplayed by Federal Reserve Chairman Jerome Powell (See Above Note in ‘Monetary’ section’), although uncertainties do still remain a risk⁴

MISCELLANEOUS

• President Biden signs into law an executive order on Artificial Intelligence development designed to establish new standards for artificial intelligence safety and security³
  • The executive order includes multiple broad directives that major developers of AI systems will need to follow, including:³
    • Require that developers of the most powerful AI systems share their safety test results and other critical information with the U.S. government³
    • Develop standards, tools, and tests to help ensure that AI systems are safe, secure, and trustworthy³
    • Protect against the risks of using AI to engineer dangerous biological materials by developing strong new standards for biological synthesis screening³
    • Protect Americans from AI-enabled fraud and deception by establishing standards and best practices for detecting AI-generated content and authenticating official content³
    • Establish an advanced cybersecurity program to develop AI tools to find and fix vulnerabilities in critical software³
    • Order the development of a National Security Memorandum that directs further actions on AI and security, to be developed by the National Security Council and White House Chief of Staff³

 

[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. Reuters. “US House Republicans eye stopgap funding measure to head off shutdown risk”. October 26, 2023
2. The Federal Reserve.” Transcript of Chair Powell’s Press Conference Opening Statement”. November 1, 2023.
3. The White House. “FACT SHEET: President Biden Issues Executive Order on Safe, Secure, and Trustworthy Artificial Intelligence”. October 30, 2023
4. CNBC. “Israeli ground forces are expanding into Gaza — but operations are deliberately ambiguous, analysts say”. November 1, 2023.