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To Hike or Not To Hike

By Kristin Withrow posted 10-31-2023 01:01 PM


Originally published by California CLASS Trading Desk  on October 17, 2023

October 2023 Economic Review

Economic data continues to make the Fed’s job challenging as we enter the last two meetings of the year. Inflation was slightly hotter than we expected in September with CPI increasing 3.7% from a year prior and increasing 0.4% quarter over quarter. While the pace of inflation slowed from its recent August high, the numbers suggest that the Fed may still have work to do to tackle prices.

Shelter and energy prices were the main catalysts for September’s inflation reading as rent and home prices bucked the trend and showed an acceleration. A surge in energy prices felt during September led to an 8.5% increase from the quarter prior which was already on top of August’s 9.1%. Core inflation, which strips out the volatile food and energy segments, reached a two-year low which is positive considering it is the Fed’s preferred gauge. However, with core inflation still above the Fed’s 2.0% level, CPI above its June low, and unemployment below 4.0%, the Fed may still have some work to do.

The U.S. consumer has displayed consistent strength despite the high inflation which we believe has been boosting the economy along with the low unemployment rate. However, we note that there is evidence that this could be beginning to shift. Consumer sentiment via the University of Michigan Index has declined for three months in a row now (though it is higher than a year ago), and consumer savings have also been on a 3-month decline since May. Credit card usage is also accelerating which can flow through to credit quality at the banks.

To cap it all off, geopolitical tensions have again flared with the recent escalation in Israel which has the ability to destabilize the economic outlook globally. At home, a prolonged fight for the Speaker of the House could push Congress up against its funding deadline again in November leading to a potential shutdown. The market now only places a 25% chance on another rate hike this year, and with all the conflicting forces in the U.S. economy right now, what the Fed chooses to do next is anyone’s guess.

Follow this link to the original publication to view current economic release data, Treasury yields, agency yields, and commercial paper data.