Volatility returned this week with some wild swings in the markets. To a large extent, these swings were based on economic data which was seemingly released by firehose this week. Additionally, all eyes are on the Federal Reserve which meets in a little over a week to decide the extent of the next interest rate hike. Combine all these events and you have a recipe for a bit of volatility and perhaps, if the cards are played right, a “Santa Claus rally.”
Let’s start with the best news of the week. Jolly Old Jerome (Powell), chairman of the Federal Reserve, brought the season’s greetings to the market with a message of goodwill towards risk. In his speech on Wednesday, Powell shifted from the more hawkish tone in his last press conference and underscored the chance of a smaller rate hike this month. Fed fund futures now price in an 80% chance of a 50-basis point hike on December 14. The wildcard is the November CPI report which comes out on December 13, the first day of the FOMC meeting, and will certainly be the central data point for the two-day meeting.
As for economic data, it is for the most part trending lower and yet staying stubbornly strong at the same time. The November Dallas Fed Manufacturing survey showed a steep decline in the region, Consumer Confidence slipped as inflation continues to take a toll on consumer spending, and pending home sales fell for the fifth straight month. On the flip side, if we’re in a recession, it is like nothing I’ve seen before. Q3 GDP was revised up from 2.7% to 2.9%, while the November Nonfarm Payrolls report showed a significant increase in hires. The report showed a jump of 263K versus the expectations for a slowing to 200K. The unemployment rate stayed steady at 3.7%, which on the surface seems great, but is working against the Fed’s aim to reduce inflation by increasing unemployment. Their unstated goal is to have the unemployment rate rise to 4.5%.
With Christmas around the corner, we might see some indication of how consumers are faring this holiday season. Depending on where you look, and what you read, you may hear that this is the worst holiday shopping year ever, or that retailers are breaking records. My anecdotal evidence is that people aren’t shopping at brick-and-mortar stores as much this year. There is some evidence that shows Black Friday was a bust for many retailers. On the other hand, the days between Black Friday and Cyber Monday showed a significant increase in online purchasing, with Amazon stating it was the best four-day period in its history. The moral of the story is that some retailers did very well, skewing to online purchases, while others struggled. Interestingly, except for Apple, we haven’t heard much about supply-chain constraints this year. Apple is likely to have an iPhone shortfall due to China’s zero-tolerance policy toward COVID and the impact that’s having on Foxconn and its manufacturing.
And lastly, a railroad strike was narrowly averted this week as both the House and Senate passed bills to prevent the railroad unions from striking. The economic impact, had they gone on strike, was estimated to be around $2B per day. The chemicals industry warned a strike would impact the 33,000 carloads it moves per week valued at $2.8B. More importantly, a potential strike would add to the headwinds facing the U.S. economy. It would likely lead to supply shortages and higher prices. Congress has intervened 18 times since 1926 in labor negotiations that threatened to adversely impact interstate commerce. I think we can all agree, paid sick leave is probably a good idea on many fronts. However, as sympathetic as one might be toward the cause, the timing of this strike would have been crippling to the economy at a time when the economy is already transitioning to slower growth.
In closing, the story of the week is once again about food. It seems being a little soft on the inside finally pays off. The iconic French baguette was added to UNESCO’s list of intangible cultural heritage practices, meaning that the UN agency believes the tradition of baking and enjoying baguettes should be preserved. The average French person consumes half a baguette every day, so the country consumes about 10 billion loaves of bread per year. What’s surprising is that French bakeries are disappearing at an alarming rate. Around 400 bakeries in the country have closed every year for the last fifty years. If only they had a way to deliver fresh baguettes to my home, I’m sure I could keep the entire industry afloat. Now you know.Bruce J. Mason, MBA