Renewed hopes for a Fed pivot premature for now, but slowdown is on the horizon

By: Edward Jones
DEWITT, Mich. - Oct. 11, 2022 - PRLog --
  • Swings in interest-rate expectations and bond yields continue to be a major driver of valuations and stock performance this year. This inverse relationship was on full display at the end of last quarter, with stocks falling below the June lows as the 10-year Treasury yields surged briefly to 4%, the highest in more than a decade1.
  • On the flip side, a brief easing in yields helped lift equities from the lows. The catalyst was a surprise move by Australia's central bank to slow its pace of rate hikes, citing the deteriorating global outlook. Together with the Bank of England's (BoE) intervention pledging unlimited purchases of long-dated bonds to calm markets, it raised hopes that Fed officials might become more sensitive to signs of financial stress from the sharp tightening of financial conditions.
  • But haven't we seen this movie before? -- The market expecting the Fed to back off and the Fed not blinking? That's how the midsummer rally quickly fizzled after Fed officials reaffirmed the bank's determination to tame inflation. And Friday's labor-market strength once again dashed hopes for a Fed pivot. The difference now is that the goalpost has moved further up after last month's FOMC meeting. Policy rates are expected to peak at 4.6% sometime next year from 4%1.
Tight labor market keeps pressure on the Fed, but there are signs of loosening
  • The U.S. economy added 263,000 jobs last month, about in line with expectations, while the unemployment rate dropped to 3.5%, matching a five-decade low. September's job growth marks a gradual slowdown from the August 315,000 gain, and the lowest monthly increase since April 2021. On the wage front, hourly earnings were up 5% from a year ago, cooling slightly from the prior month, but still well above the pre-pandemic norm1.
  • Last week's data included the number of job openings, which decreased 10.0% in August, the most since April 2020, and the fourth decline in the past five months1. The gap between the number of jobs and the number of unemployed remains high from a historical perspective, but it is starting to narrow. For now, companies are slowing the pace of hiring before cutting jobs, therefore keeping the unemployment rate low.
Sources: 1. Bloomberg, Edward Jones, 2. FactSet

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