Market expects the Fed to keep rates steady following positive data, while large tech companies reported disappointing earnings

U.S. economic data

U.S. Gross Domestic Product (GDP) came in at 4.9% (annualized pace) for the third quarter of 2023. This was the highest level seen in the last seven quarters, is significantly higher than Q2’s reading of 2.1%, and beat analyst expectations of 4.5%. The increase came from a variety of factors, most notably consumer spending, which drove 2.7% of the total 4.9% increase. The report confirmed what investors and other data readings, including Retail Sales, had been showing: despite increasing prices and higher rates, the U.S. consumer has continued to spend.

U.S. Personal Consumption Expenditure “PCE” data, the Federal Reserve’s preferred method of inflation, came in relatively in line with expectations for the month of September. Year-over-Year PCE Core (less food and energy) was 3.7%, the lowest level seen since June 2021, but still stubbornly above the Fed’s long-run target of 2.0%. Month-over-month PCE Core (less food and energy) came in at 0.3%, in line with expectations, but the highest level seen since April.

Rates update

The recent U.S. economic data solidified expectations for the Federal Reserve to keep rates at the current target range of 5.25% – 5.50% at their November meeting. As far as the following FOMC meetings in December and January, the market is split between expecting the Fed to keep rates steady or to hike an additional 25 basis points. Based on where Fed Funds Futures are currently trading, the market implied probabilities for the January meeting include a 72% probability of the Fed holding steady and a 28% probability of a hike. The market is currently pricing in the first 25-basis-point rate cut in June 2024, with one to two more priced in by 2024 year end.

The 2-year U.S. Treasury yield traded around 5.00% on Friday, down from a peak of over 5.20% from earlier in October, but still near levels we have not seen since 2007. Meanwhile, the 10-year U.S. Treasury yield traded around 4.84% on Friday, bringing the inversion between the 2’s and 10’s to a level of approximately 16 basis points, the smallest level in more than a year. Although rates are near decade highs, entering into a swap will still allow a company to reduce its immediate interest expense. For example, 1-month Term SOFR was 5.32% on 10/27/23, while a company could lock in a 3-year swap rate at approximately 4.60%.

Equities update

Last week, the S&P 500 traded at the lowest seen in the last five months amid yields nearing 16-year highs and following lackluster quarterly earnings reports. Disappointing earnings from big players in the tech industry including Meta Platforms Inc., Nvidia Corp., and Microsoft Coro caused the S&P 500 to approach correction territory.

Looking ahead

All eyes will be watching on Wednesday November 1 for the FOMC Rate Decision and the press conference from Chair Powell which will follow. On the data front, the week is heavy on the labor market as ADP Employment is published Wednesday and Nonfarm Payrolls and Unemployment is scheduled for release on Friday. Finally, geopolitical developments in Israel and Gaza continue to loom in the background and have the potential to impact market sentiment and the demand for safe-haven U.S. Treasury bonds.