Equities Propelled By Lower Rate Expectations – Global Equity Update

Equity markets rebounded in November as stabilizing inflation stirred optimism that lower rates would eventually materialize. The Dow Jones Industrial Average, S&P 500 Index, and the Nasdaq all climbed modestly in November. Foreign developed and emerging market equity markets outperformed U.S. equities in November, propelled by a slightly weakening U.S. dollar along with lower global interest rates.

Corporate earnings are a key focus for analysts, particularly for companies exposed to consumer sentiment and the economic environment. Many retailers have discounted heavily in preparation for a challenging holiday season. (Sources: Dow Jones, S&P, Nasdaq, Bloomberg, Reuters)

Some Reprieve As Rates Fall Modestly – Fixed Income Overview

With the new year approaching, many analysts expect the Fed to begin slowing its rate hike trajectory. Currently, the Fed Funds Rate range is 3.75% to 4.00%, up drastically from its two-year stint at 0%. The benchmark 10-year Treasury bond yield ended November at 3.68%, down from 4.10% at the end of October. Mortgage and personal loan rates fell modestly, adding buoyancy to consumer demand.

Shorter-term maturity yields for Treasury bonds remained higher than longer-term Treasury bond yields at month end, representing an inverted yield curve indicative of probable slowing economic activity. Yields on the 1-year Treasury note was 4.74%, compared to 3.68% on the 10-year Treasury bond on November 30th. (Sources: U.S. Department of the Treasury, Bloomberg, Reuters)

OPEC Decides To Cut Oil Production – Oil Industry Overview

The Organization of the Petroleum Exporting Countries (OPEC) is a group of nations that comprise the world’s major oil producers, producing more than half of the world’s crude oil. OPEC recently announced its largest cut to its production of oil since April 2020, dropping daily production by 2 million barrels. This decision is likely to raise gas prices for consumers across the globe and increases tension in already-strenuous relations between Saudi Arabia and the United States.

Saudi Arabia, the de facto leader of OPEC, will voluntarily cut production while other OPEC members including Iraq may not be able to afford lower production levels. While Saudi Arabia denied that the production cut would harm Saudi-U.S. relations, U.S. officials see it as an act of aggression that may force a reevaluation of relations. U.S. officials claim that Saudi Arabia is choosing to side with Russia, which has lost daily production of around 1 million barrels per day due to its war with Ukraine. OPEC’s production cut could undermine the efforts of Western countries to curtail Russian oil revenue. (Sources: Wall Street Journal, U.S. Energy Information Administration, Organization of the Petroleum Exporting Countries, Federal Reserve Bank of St. Louis)

Unemployment Rate Expected to Rise Heading Into 2023 – Labor Market Update

In September 2022 the unemployment rate hit 3.5%, its lowest point since the start of the pandemic. New Fed forecasts predict the unemployment rate will rise to 4.4% in 2023. A 4.4% unemployment rate is still historically quite low, although pre-pandemic unemployment rates hovered around 3.5%. Economists largely expect the true unemployment rate to breach the Fed’s expectations and reach 5% as early as the first quarter of 2023. By the end of 2023, the unemployment rate is forecasted to be as high as 6%. In examining pre-pandemic years, a 6% unemployment rate would be a nearly decade-long high, last seen in 2014. Early warnings are evident, as exemplified by new mass layoffs in the tech sector.

The main reason for the high unemployment rate projections is the Fed’s continued increase in interest rates. These increases have pushed the U.S. economy into a potentially recessionary environment, and are expected to continue. While the Fed may slow its raises to only 0.5 or 0.25 basis points instead of their recent 0.75 increases, economic indicators signal that it may soon be time to pause these increases to avoid high unemployment and a recessionary environment driven by sharp decreases in consumer and business spending. (Sources: U.S. Bureau of Labor Statistics, Federal Reserve Bank of St. Louis)

Elevated Food Inflation Continues – Consumer Demand Dynamics

The most recent measure of food inflation is 8.2%, with 2022 inflation at the highest level since the 1980s. The category experiencing the steepest price hikes appears to be food prices. Price increases at grocery stores directly affect all consumers, prompting many to reconsider what they place in their shopping carts. Currently, several food categories are at all-time inflation highs, meaning the price spikes from last year to now are the highest ever recorded. At the top of these categories is food at employee sites and schools, which includes cafeteria food at public schools. This category is up a massive 91.4% from a year ago. Other categories seeing all-time high price jumps are butter and margarine which have spiked by 32.2%, flour which has leaped by 24.2%, soup which has jumped 20.5%, cereal which is up 17.7%, and canned fruits and vegetables which have increased 19%. An additional category seeing tremendous pricing pressure is eggs, which over the past year have risen 30.5%. The prices of these common groceries have major effects on consumer decision-making. Due to inflation, consumers are increasingly only buying necessities and may further limit their purchases. Consumer spending makes up nearly 70% of GDP, so when consumer spending falls due to high prices, GDP can also be expected to fall. (Sources: U.S. Bureau of Labor Statistics, Bureau of Economic Analysis, Federal Reserve Bank of St. Louis)