Fed Governors Offer Mixed Views, Bowman, Waller: Nov. 28, 2023

Investors are rolling up their sleeves with four Fed representatives giving presentations today while markets bounced back into the green after facing earlier selling pressure. Also today but across the Atlantic, ECB President Lagarde and BOE committee member Haskel are providing monetary policy briefings. Against the backdrop of policymakers’ remarks, U.S. data this morning depicted consumer concern about their medium-term economic fortunes.

Investors Brace for Barrage of Fed Speak

Investors are anxiously waiting to see if the numerous presentations today from Federal Reserve members spread holiday cheer with dovish inflation comments or steal the stage from Ebenezer Scrooge by embracing a hawkish outlook. With a period during which Federal Reserve members are prohibited from making public comments starting this Saturday, today’s presentations will be one of the last opportunities for investors to gain insights into the likelihood for the central bank to maintain a higher-than-expected fed funds rate for longer than anticipated or instead usher in rate cuts early next year.

The following Fed members are scheduled to speak today at the noted times:

Fed Governor Christopher Waller, 10:00 a.m.                                                       

Chicago Fed President Austan Goolsbee, 10:00 a.m.                                       

Fed Governor Michelle Bowman, 10:45 a.m.                                                

Fed Governor Michael Barr, 1:05 p.m. and 3:30 p.m.     

Consumers Remain Worried

Consumer confidence improved slightly in November, the first increase in four months, but households continued to be stressed from elevated financing costs, diminishing credit availability and loftier prices. This month’s 102 headline number for the Conference Board’s Consumer Confidence Index beat the 101 expected by analysts and October’s 99.1 result. The Present Situation Index fell to 138.2 from 138.6 month-over-month while the Expectations Index rose to 77.8 from 72.7. Roughly two-thirds of surveyed consumers believe that a 2024 recession is either somewhat or very likely. Big-ticket purchases were also a headwind, with households decreasingly likely to complete transactions for automobiles, homes, appliances and more.

Households Turn to Buy Now, Pay Later

Consumers are continuing to splurge and are setting new records for online shopping, according to data from Adobe, but they are also leaning on discounts, credit and buy-now-pay-later promotions. Online shoppers spent $12.4 billion yesterday, setting a new Cyber Monday record and climbing 9.6% year-over-year (y/y). With consumers’ pandemic savings exhausted and costs of living having increased considerably, many online shoppers relied on buy now, pay later, with the category of transactions yesterday increasing 42.5% y/y to $940 million. Adobe also reported that the five-day period from Thanksgiving through Cyber Monday produced $38 billion in sales, a 7.8% y/y increase.

Markets Come Back

Markets were lower prior to remarks by Goolsbee, Waller and Bowman but have now reversed and are green across the board. Governor Waller implied that the Fed could cut rates if price pressures continue to dwindle while Governor Bowman went the other way, stating she’s willing to support further rate hikes if inflation progress stalls. She cited a lack of fiscal restraint, uncertain commodity prices and limited labor supply as reasons that could push price pressures higher. All U.S. equity indices are higher led by the Dow Jones Industrial Average which is up 0.4% while the S&P 500, Nasdaq Composite and Russell 2000 indices are higher by 0.2%, 0.2% and 0.1%. Sectoral breadth is terrific with all sectors higher except for the defensive healthcare sector, it’s down 0.1%. Energy and utilities are leading, they’re up 0.8% and 0.7%. Energy stocks are benefitting from a sharp increase in the price of crude oil, which is trading higher due to a severe Black Sea storm that is hampering production levels by up to 2 million barrels per day from Astana and Moscow. The commodity is also finding support from a weaker dollar, lower bond yields and anticipations that OPEC + will reduce production at the cartel’s meeting this Thursday. WTI crude is up 2.4%, or $1.80, to $76.79 per barrel. Bond yields are sharply lower on the back of Waller’s comments supporting rate cuts, with the 2- and 10-year Treasury maturities trading at 4.34% and 4.78%, as the instruments’ yields drop 4 and 11 basis points (bps). The dollar is lower for the same reason, as the greenback depreciates versus the euro, pound sterling, franc, yen, yuan and Aussie and Canadian dollars. The Dollar Index is down 40 bps to 102.78.

Equity Gains Depend on Fed Funds

At this point in the economic cycle amidst a strong year-to-date market rally, future equity gains are likely to be dependent on the Federal Reserve tilting to a dovish monetary policy. If the Fed maintains a hawkish stance, then short-duration Treasuries will have to reprice rate cuts into the second half of next year rather than the first. This is likely to lead to a burst of volatility across asset classes as market players adjust to the higher-for-longer melody.  

Join Me in Boca

I look forward to joining a panel discussion during the Noble Capital Markets’ 19th Annual Emerging Growth Equity Conference. The conference is being held December 4-5 in Boca Raton, FL and features a discussion with George W. Bush, 43rd president of the United States. My panel will follow opening remarks at 8 a.m. on Monday, December 4, and will provide timely insights into monetary policy and the direction of the economy. If you would like to register for the event, please contact me at jtorres@ibkr.com.