November 2022

Macro Updates

Indicator	Result	Period	Impact/Significance/Discussion
Federal Funds Rate (FOMC)	75 bps increase 3.75% to 4%	Nov 2, 2022	The highlight of the month was definitely 75 bps rate hike by the Fed. This rate hike was anticipated by the market. However, in his remarks, Chairman Powell indicated that the terminal rate might be 5% or higher. The market's reaction to this rate increase was mixed. It appears that the Fed stay the course for raising rates by 50bps in December 2022, followed by two 25 bps increased in Q1-2023.
ISM Manufacturing PMI (Institute for Supply Management)	49%	Nov 2022	Manufacturing PMI was reduced by 1.2% to 49% from the prior month (50.2% in October, which in turn, was down from September). An amount lower than 50 indicates a slowdown in manufacturing activities. This is in line with a more restrictive environment that the Fed is trying to create.
ISM Services PMI (Institute for Supply Management)	56.5%	Nov 2022	Services PMI increased in Nov 2022 to 56.5% (Oct 2022 was at 54.4%). The feedback from businesses was generally positive. This indicates the strength of the service sector which is strong in contrast with manufacturing PMI that is weakening. Note that this finding is consistent with the CPI report which shows inflation is cooling off in durable goods but still strong in services.
Employment Situation Report (BLS - Bureau of Labor Statistics)	3.7%	Nov 2022	The unemployment rate remained unchanged at 3.7% in November 2022. In October, the unemployment rate increased by 0.2% to 3.7% compared with September 2022. The unemployment rate has been in a narrow range of 3.5% to 3.7% since March. The Participation Rate was at 62.1% in November (62.2% in October, and 62.3%, 62.4% and 61.7% in Sep 2022, Aug 2022, and Oct 2021, respectively.) So, even though the participation rate improved compared with last year, it has been on a decline since August, which is not a desirable outcome. Note that the most desirable outcome for the Fed is an increase in the unemployment rate by an increase in the participation rate. But an increase in participation rate will not happen unless immigration laws make it possible. The reason for low participation rate is retirement (population aging). The participation rate among prime age population is still high.
CPI (BLS - Bureau of Labor Statistics)	7.7% y/y 0.4% m/m	Oct 2022	Headline CPI (Consumer Price Index) rose 0.4% in October on a seasonally adjusted basis, the same increase as in September. The increase for shelter and transportation services were significant (0.8%). Fuel oil was up astonishing 19.8%. While gasoline was up 4%, electricity was almost unchnaged and gas was down 4.6%. Food was up 0.6%. All items above were month-over-month. On an annual basis, headline CPI was up 7.7% and core CPI was up 6.3%. Markets rallied in response to this release. Note that apprale and used cars were down 0.7% and 2.4% respectively.
PCE (BEA - Bureau of Economic Analysis)	0.3% m/m	Oct 2022	The PCE Price Index increased 0.3% month-over-month in October 2022 (0.4% in prior month). Excluding food and energy, the PCE Price Index increased 0.2%. DPI (Disposable Personal Income) increased 0.4% in October and PCE (Personal Consumption Expenditure) increased by 0.5%. Personal saving as a percentage of disposable personal income was 2.3%. Note that this ratio was 3.8% in March 2022 and has been declining gradually since then down to 2.3% in October. (Note that DPI in nominal terms increased, but it decreased in real terms. See the full report for details) Note that the Fed pays special attention to PCE and core PCE. Below is the recap: PCE, Month over month change: (Oct +0.3%) (Sep +0.3%) (Aug +0.3%) (Jul -0.1%) PCE, excluding food & Energy, month over month change: (Oct +0.2%) (Sep +0.5%) (Aug +0.5%) (Jul 0.1%) As you can see, on a monthly basis, Core PCE was reduced in October even though Headline PCE remained unchanged. PCE on an annual basis was up 6% in October (6.3% in Sep, 6.2% in Aug, and 6.4% in Jul) Core PCE on an annual basis was up 5% in October (5.2% in Sep, 4.9% in Aug, 4.7% in Jul)
PPI (BLS - Bureau of Labor Statistics)	0.2% m/m	Oct 2022	The PPI (Purchase Price Index) for final demand increased 0.2% in October, seasonally adjusted. The final demand prices rose 0.2% in September and were unchanged in August. While the 'final demand goods' increased by 0.6%, the 'final demand services' decreased by 0.1%. Prices for final demand less foods, energy, and trade services advanced 0.2% (same as PPI including these items) in October following 0.3% rise in September. Trade and transportation decreased by 0.5% and 0.2%, respectively. Markets rallied in response to this release as the increase was less than consensus.
ISM PMI (ISM - Institute for Supply Management )	50.2	Oct 2022	The Manufacturing PMI of 50.2 in October was slightly lower than 50.9 in September, which followed by 52.8 in August and July. Note that PMI of above 50 indicates expansion and below 50 indicates contraction. This is result shows the resiliency of manufacturing sector in the US.
S&P Global US Manufacturing PMI (S&P Global )	50.4	Oct 2022	The October result of 50.4 was lower than the Septmber PMI of 52.0. The number is close to the ISM PMI, with the same interpretation.

Other Indicators:

United States Existing Home Sales decreased by 5.90% in October compared with September. The year-over-year decrease was 28.4%.
Source: National Association of Realtors (NAR)

Figures above are in thousands. Home sales have been on a downward trend since Jan 2022.

Unemployment insurance weekly claims:
In the week ending Nov 12, 2022, seasonally adjusted initial claims was 222,000, a decrease of 4,000 from the previous week’s revised level. The claims are close to their 2019 average.
Click here for the graph in FRED.

What to expect based on the data and market reaction?

November 18 remarks: S&P500 is up 2.41% compared with Oct 31 close. it appears that the market reacts to a hint of good news, which in this case is any indication that inflation is subsiding. At GGC, we believe that the inflation will return to the Fed’s 2% target some time after Q2-2024 (see our Economic Outlook post that we published in August 2022, in which we forecasted that the inflation would be down to 3 or 4% around Q3-2023). It appears that what the market is pricing in is a rate cut toward the end of 2023. Even if there is a rate cut, it will be very small and toward the end of the year, and basically a reversal of excess hikes in early 2023. Obviously, our expectation is based on the assumption that the Fed is serious about inflation control and does not bow down to politics. Interestingly enough, the Fed has done a much better job than we initially expected and stayed the course despite some criticism from politicians.
Another reason for the optimism was face-to-face discussion between the leaders of the US and China. Also, recent positive developments in China’s covid policy and housing markets were well-received by investors.

Money Supply

As we have done in our previous posts, we follow the money supply closely because not only it augments the impact of rate hikes, but it has a restrictive impact of its own.
Click here for the source.
As you can see, M2, Reserve Balances and Monetary Base are declining for the second month in a row, a trend that is expected to continue.

What will be the impact and when/where/how it will manifest?
There is not much empirical data around quantitative tightening (“QT”) at this scale and its impact on the economy. However, we know that reducing the money supply will make the money more expensive (that is, the interest rate will rise). That, in turn, will impact companies’ capital expenditure and expansion decisions as they become more selective about the projects and scale down expansions. So, theoretically, we expect that QT augments the impact of the rate hikes in cooling down the economy. So, we expect to see the result in lower earnings as companies reconsidering their expansion plans. But this will show itself in the Q2-2023 or later, because the existing expansion plans are still in motion and will result in either sustaining the earnings or even increasing this. In conclusion, although we don’t have any historical precedent, we expect to see the impact of QT in around Q2-2023 or later in the companies’ earnings. Companies with poor management and unclear long-term strategic plans will be impacted the most, and most likely will be driven to bankruptcy. But well-managed companies will be able to weather this period and perhaps even gain from it by obtaining a larger share of the market as weak companies are driven out.

Source: Federal Reserve Website