The Fed begins its meeting today and most still expect officials will leave the benchmark rate unchanged at 5.25%-5.50%. While traders place the odds of "no change" at 99% this month, the outlook for the October 31-November 1 remains divided with odds of the Fed holding rates "unchanged" again just shy of 66%, versus around 34% that the Fed lifts rates by another +25 basis-points. That's close to where outlooks stood a month ago despite recent data indicating that inflation may be reemerging in some sectors.
The bigger change has been where traders see rates ending next year, with many seasoned investors increasing how long they think the Fed will keep rates at higher levels, which is exactly the message that central bankers have been hammering home for months now. Bulls have been slow to adjust their thinking on how soon the Fed might cut rates but most still seem to think the US economy is strong enough to withstand an extended period of higher interest rates, assuming that inflation continues drifting lower. In fact, some Wall Street insiders think the US economy is so strong that the Fed may forecast fewer rate cuts for next year in its updated "dot plot," which shows where central bank officials expect interest rates will be in the future.
The Fed in June projected its benchmark rate would end 2024 at a median of 4.6%, or between 4.5%-4.75%, implying a full point cut from where it sits now. Fed officials may also be inclined to keep their estimates conservative right now as they factor in the inflationary forces of energy prices and wage increases that union's are racking up this year.
The UAW strike in particular is creating a lot of uncertainty. For one, it could deliver a big upward jolt to wage inflation if the union gets the +36% pay raises it's asking for. The strikes could also drive car prices back up if work stoppages drag on for an extended period. An extended strike could additionally deliver a hit to US GDP and tip the economy into recession.
Economists warn that while these various factors may not push inflation any higher, they could still work to keep it elevated above the Fed's +2% target rate far longer than Wall Street bulls have been anticipating.
Today, investors will be digesting Housing Starts and Permits, as well as earnings results from AutoZone.
Higher energy costs, more people striking, possible government shutdown, consumers sitting on less savings, and increasing debt to be concerned about.
Homebuilder Sentiment Goes Negative for the First Time in 7 Months: U.S. homebuilders are feeling pessimistic about their business for the first time in seven months, thanks to stubbornly high mortgage rates. Builder confidence in the single-family housing market fell 5 points in September to 45 on the National Association of Home Builders/Wells Fargo Housing Market Index, following a 6-point drop in August. Anything below 50 is considered negative. The index’s three components all declined with current sales conditions falling 6 points to 51, sales expectations in the next six months also dropping 6 points to 49, and buyer traffic decreasing 5 points to 30. As a result, builders are starting to offer more incentives again. In September, 32% of builders said they cut prices, compared with 25% in August. That’s the largest share of builders reducing prices since December 2022, when 35% were doing so. Source Axios
Fed’s Next Decisions on Rates Could Lead to a Wave of Commercial-Debt Defaults: Getting staff back to the office is only part of the battle. Regional banks that went big lending on office properties also face a ticking time bomb of maturing debt that they helped create, particularly if the Federal Reserve holds its policy rate near the current 22-year high well into next year. The area of greatest concern for banks is office space, says Tom Collins, senior partner focused on regional banks and credit unions at consulting firm West Monroe. Should rates stay high, borrowers are going to face a tough decision of whether they refinance or default, he said. The fight to bring more staff back to half-empty office buildings comes as an estimated $1 trillion wall of commercial real-estate loans is set to mature through 2024 but banks can help mitigate the wall of debt coming due by stepping up the pace of loan modifications to help borrowers keep properties. Collins said he also anticipates lenders will need to increase loan sales, write-downs and mergers or acquisitions. The obvious question there is at what discount?” he said, adding, “I think investors will wait until things get more dire to try to get a better deal. Another offset to banks’ office exposure has been the relatively stable performance of hotels, industrial and other property types. But Collins said that if rates stay high and the economy falters, those sectors are likely to face challenges as well. Source Marketwatch
US National Debt Exceeds +$33 Trillion for First Time... Government Shutdown Possible, What You Want to Know: Not only has the US national debt pushed beyond +$33 trillion for the first time, but there's more and more talk that we could actually see a government shutdown in the coming weeks. McCarthy doesn’t seem to have even enough Republican support to get his proposed plan out of the House, which in my opinion wouldn't have made it past the Senate and White House if he did get the Republican support in the House. All of which raises the odds of a government shutdown at the end of the month. From what I have heard, even if the government shuts down, benefits such as Social Security and Medicare continue to flow because they are authorized by Congress in laws that do not need annual approval (although the services offered by Social Security benefit offices may be limited during a shutdown). In addition, the Treasury can continue to pay interest on U.S. Treasury debt on time. Source Brookings
Investors Keep Putting Money Into Private Credit: The boom in alternative assets has been a big winner for managers of those funds in recent years, as things such as bespoke corporate lending take share from what has traditionally been the business of banks. However, one recent wrinkle has been a worry that the people supplying money to those funds might not keep pouring in cash as interest rates rise—especially when it comes to wealthy individuals, one of the major sources of growth. Even if certain funds—including more traditional private-equity buyout funds facing a tough deal-making environment—might not be seeing strong inflows, funds in other assets are making up for some of that. The Blackstone Private Credit Fund said inflows into the nontraded vehicle were $2.4 billion in the third quarter reported so far, up +30% from the prior quarter. Even within real estate, despite concerns about office and other property values, some strategies are still attracting inflows: The Blue Owl Real Estate Net Lease Trust, which is in the expanding market for the sale and lease-back of properties, has reported raising over $1 billion since its launch in 2022. Money from wealthy individuals has been a growing source of funding for private credit and other “alternatives” to traditional stocks and bonds. The usual sources of funds—giant institutions—also remain active in key areas. Source WSJ
American Companies Have Taken a Substantial Hit from Strikes This Year: August alone saw some 4.1 million labor hours lost this year due to strikes, the most for a single month since August 2000, according to the Labor Department. Combined with July, there were nearly 6.4 million hours lost from 20 stoppages. Year to date, there have been 7.4 million hours lost, compared to just 636 hours total for the same period in 2022. Those big numbers have been the result of 20 large stoppages that have included the Writers Guild of America and Screen Actors Guild, state workers at the University of Michigan and hotel employees in Los Angeles. Some 60,000 health care workers in California, Oregon, and Washington are threatening to walk out next. After years of being relatively quiescent, unions have found a louder voice in the high-inflation era of the past several years. At the same time, unions have made up a progressively smaller share of the workforce, declining to a record low 10.1% in 2022, about half where it was 40 years ago, according to the Labor Department. Just 6% of private sector workers are unionized, while 33% of government workers are organized. Source CNBC
Instacart Values IPO at $30 Per Share: Instacart, the grocery-delivery company that saw its business boom during the pandemic, priced its long-awaited IPO at $30 a share on Monday, and will become the first notable venture-backed tech company to hit the U.S. public market since December 2021. The offering came in at the top end of the expected range of $28 to $30 a share, and values Instacart at about $10 billion on a fully diluted basis. There were 22 million shares sold in the initial public offering, with 14.1 million coming from the company and 7.9 million from existing shareholders. The stock is set to debut on the Nasdaq Stock Market on Tuesday under ticker symbol “CART. The 11-year-old company, which delivers groceries from chains including Kroger, Costco, and Wegmans, had to drop its stock price dramatically to make it appealing for public market investors. In early 2021, at the height of the Covid pandemic, Instacart raised money at a $39 billion valuation, or $125 a share. Source CNBC
Clorox Warns of Product Shortages Following Cyberattack: Clorox says it’s experiencing product shortages nationwide across its categories following last month’s attack on its information-technology systems, and the company projects a “material” impact on its quarterly results. The producer of disinfectants, wipes, cat litter, salad dressing and cleaners said some of its US factories still aren’t making goods, although the “vast majority” have resumed output. Clorox took down certain internal systems after the hack, which resulted in several weeks of ceased production. For now, the company is manually processing orders at some facilities — a task that is usually automated — as it restarts operations. Automated orders are expected to restart next week at Clorox’s US plants. All of Clorox’s US facilities were affected by the attack, which was first announced Aug. 14, including its new cat litter facility that opened late last year in Martinsburg, West Virginia. The company’s factories have remained open despite halting production and employees continue to be paid. Instead of producing goods, workers have focused on cleaning, maintenance and training. Source Fortune
Military Ask for Public's Help to Find Missing Fighter Jet: The chief of the US Marines ordered a pause in air operations to review safety and best practices as the military continued its search for a $100 million F-35 fighter jet that disappeared after a mishap forced the pilot to eject from the aircraft during a training mission over South Carolina. The Marine Corps said in a statement that General Eric Smith, the service’s acting commandant, “directed all Marine Corps aviation units to conduct a two-day pause in operations this week to discuss aviation safety matters and best practices.” It cited three “Class A’ mishaps in the last six weeks. Earlier, the military asked for civilian help in finding the F-35B Lightning II jet that suffered a “mishap” on Sunday afternoon, according to social media posts by Joint Base Charleston, an air base in South Carolina. The military’s inability to track the sophisticated aircraft raised questions about whether its transponder, a device that sends out signals on a plane’s location, was working properly during the flight and after the pilot’s ejection. The F-35 program, the most expensive US weapons program ever, is projected to cost $412 billion in development and acquisition, plus an additional $1.2 trillion to operate and maintain the fleet over more than 60 years. A single jet can cost more than $160 million, depending on the variant. Source Bloomberg
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