Brian Pietrangelo:
Welcome to the Key Wealth Matters weekly podcast where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun. Giving you the keys to unlock the mysteries of the markets and investing.
Today is Friday, November 3rd, 2023, I'm Brian Pietrangelo, and welcome to the podcast. In case you forgot, daylight savings time ends this Sunday where we turn back the clocks, which means it gets darker earlier. But don't worry about being in the dark when it comes to economic and market updates because with me today, our panel of investing experts are here to shine the light on this week's market activity and more. George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, Rajeev Sharma, Head of Fixed Income, and Cindy Honcharenko, Director of Fixed Income.
As a reminder, a lot of great content is available on key.com/wealthinsights. Including updates from our Wealth Institute on many different subjects and especially our Key Questions article series addressing a relevant topic for investors each Wednesday. In addition, if you have any questions or need more information, please reach out to your financial advisor.
Taking a look at this week's economic news, we've got three major updates to share with you today. First, in terms of overall economic growth, we looked to the purchasing manager's indices, which showed that on the manufacturing side of the economy it has been in a contraction for the last 12 months. On the other hand of the coin, if we look at the services economy, it's been an expansionary mode for the last nine consecutive months. So a little bit of a split decision there when it comes to looking at the economy in the US. Second, we have a whole host of information as it relates to the employment picture, beginning with the Bureau of Labor Statistics report on the employment cost index, which comes out quarterly for the last month into September of 2023. Showed a 4.6% increase in terms of wages and salaries, which was the same as the quarter ending prior in June, but was down a little bit from 5.1% at this time last year in September of 2022. So it shows that wages and salaries are still elevated, but slowly coming down a bit.
On Wednesday, we also had the job openings report that came out for the month of September showing 9.6 million job openings, which basically the same as the month prior. On Thursday, initial unemployment claims for the week ending October 28th came in at 217,000, which was moderately above last week's report. And even though we don't typically talk about it on the podcast, today we're mentioning the continuing claims or continuing unemployment claims, which were at 1.8 million for the week. Which shows a decent uptrend in the past month or so, which is about up 10% for the past six weeks. So this is showing those that were out of work that are continuing to file for unemployment claims are not getting jobs in a reasonable amount of time, which is a little bit of a negative sentiment in terms of the overall employment picture.
And finally, just this morning, new non-farm payrolls for the month of October were released and came in at 150,000 new non-farm payrolls. Which was lower than expectations and half that of the prior month in September. In addition, both September and August figures were revised downward to the tune of roughly 100,000 jobs. So definitely seeing some of the economy slowing in terms of jobs, but some of this might've also been related to the strikes that were happening in the United States.
And third, and probably most importantly for the week, the Federal Reserve had its November meeting in terms of the open market committee where they decided to leave the Fed funds rate unchanged at an upper limit of 5.5%. So we'll certainly talk about that a lot in the podcast given its importance. And we'll start with Cindy to get her take on the meeting, with respect to what did the Fed do? What did the Fed say? And what does it mean for investors? Cindy.

Cynthia Honcharenko:
So the Federal Open Market Committee left the target range for the federal funds rate unchanged at five and a quarter percent to five and a half percent. This was a unanimous decision and in line with the economists and market expectations. The FOMC policy statement was once again little change from September. There were some word substitutions. But the addition of a reference to financial conditions in addition to credit conditions as potential causes for more drag on economic activity may be a hint that rate hikes are in fact done. I think by adding financial conditions as a factor likely to weigh on economic activity and inflation ahead, the statement reinforced that policymakers recent comments on the subject weren't orchestrated effort. Though the extent of these effects remain uncertain, even the more hawkish fed participants admit that the possibility that further rate hikes may not be needed if restraint from higher long-term rates proves persistent.
The Fed looks increasingly content but maintains a nominal tightening bias. It will take more than near 5% GDP growth in third quarter, and strong job reports that were revised lower alone to prod the Fed to hike further. When asked about what would make the Fed tighten policy further, Chair Powell focused on progress toward the dual mandate and then added restriction that the accompany persistent tightening and financial conditions. Over a year ago, if we recall, Fed Chair Powell used the November FOMC communications synthesized the destination, ie, the level of the policy rate over the pace of tightening. His latest messaging reveals an increasing confidence that the Fed has already arrived at the restricted rate. The Chair is hesitant to acknowledge the job is done and risk market participants shifting their focus toward rate cuts. So he nominally retained the optionality to re-engage with further tightening if necessary, but did not convey much sense of urgency.
So long as progress on inflation and labor market rebalancing continue, even if bumpy, I expect the Fed to remain patient, reinforcing my view that the funds rate will remain on hold at 5.5% for an extended period of time. It would be in the best interest of investors to remain neutral duration, expect curve steepening and tighter swap spreads. The spread tightening bias has shifted towards shorter tenders on the UST curve driven by treasuries November refunding decision to issue more bills versus coupons. Investors should cautiously and selectively add duration, but refrain from a constructive duration stance until economic data moderates. Rajeev, I'd be curious to hear your take on the Fed meeting this week.

Rajeev Sharma:
Well, I agree Cindy. I think the Fed left the door open for another rate hike with their specific language that you mentioned. At the same time, I feel the Fed had to leave that door open, they had to keep that language in there. And not specifically go on and say that we're done raising rates, given their data dependent stance on inflation. All that being said, I feel the Fed is done raising rates. I think two back-to-back pauses is something that we didn't see since early 2022. We've been used to seeing a hike, a pause, a hike, a pause, and we're not seeing that. We saw two pauses, two back-to-back pauses. I think that can be interpreted by the market that this is now at least an extended pause. December rate hiking probability is also point to a Fed on hold. A pause in December is already priced into fed swaps.
The recent surge that we saw in rates over the past month kind of did the job for the Fed. I think the feds saw that surge in rates across the yield curve, specifically in the intermediate and longer part of the yield curve. And Fed members rightfully pointed out that financial conditions are getting tighter. And that could weigh on the economy, which is again doing the job of the Fed. But the Fed wants the market to think like the Fed. The Fed wants the market to come around to that higher for longer thinking. So they didn't mention any rate cuts. Without that, the front end of the yield curve stays elevated.
Now, one would point to the note that Fed Chair Powell said in his press conference that the committee has to keep asking itself over and over again, are we sufficiently restrictive? Now, this really surprises me because after 525 basis points of rate hikes, to continually ask yourself if we're sufficiently restrictive or not, doesn't really make a lot of sense to me. And I think it's kind of surprising to the market, as well.
The second question the committee always keeps asking itself is, how long do we keep the rates elevated? Now, that is something that I think the market is trying to get a handle on. Essentially, I think what happens in this meeting is nothing really surprising about the FOMC meeting, but essentially Fed Chair Powell kind of left the door open and kind of insinuated that every meeting is going to be a live one. But the market is not viewing it that way. The latest unemployment data with the jobs number points again to a potential slowdown of the US economy, something that is causing a rally in the treasury markets. We've seen yields drop across the yield curve. It's also giving bond traders a rationale to price in more rate cuts for 2024. The bond market right now is calling for more rate cuts than the 50 basis points that the Fed is calling for 2024. In fact, the fed swaps right now are pulled forward the chance of a 25 base point rate cut from July to June. What are you seeing here, George? What was your take on the FOMC meeting?

George Mateyo:
Well, you guys crushed it. I mean, I'm not sure if I get anything more than what you already said. I mean, those are really perfect summaries as I see it. I mean, the one thing that I kind of took away from it though is that I think Powell maybe for the first time in a while, kind of threaded the deal pretty effectively. I mean, he talked about the fact that he's not confident in the fact that his job is done. I mean, he was pretty emphatic about being not confident, which I think is kind of [inaudible 00:10:09] were saying, hey, we might have to do a bit more.
But at the same time, he said a couple times that he's proceeding cautiously. So kind of balancing that risk out about maybe taking additional steps to try and take inflation down a bit further. But at the same time, recognizing as you pointed out, that he's done a lot already. I mean, they've done a lot to try and take inflation down, and that seems to be working. It's cooling, but it's still not quite cooled. So again, not confident, but cautious I think was kind a code word for trying to have your foot on the boat and at the dock at the same time. And so far he's able to do that without getting wet.
I guess the week itself though, in the spirit of Halloween, you could almost kind like to the fact that this might be kind of analogous ... this week anyway, would be analogous to Goldilocks and the three bulls. Not the three bears, but the three bulls. You talked about the fact that the Fed has kind of acknowledged that the long end of the yield curve was something that was caused per concern. That was probably another way of saying that we see the rates backing up a little bit and we need to do less because the market's kind of doing our work for us.
The second thing you talked and you alluded to the fact that the treasury funding was out there. It was a big number. I mean, I think it's kind of mentioned the market actually rejoiced the fact the number wasn't bigger, but it's still really quite big in terms of the overall borrowing by the federal government right now. It's a staggering number, but it wasn't quite as staggering as people thought. So that alone again suggests that maybe it's not quite as dire as people thought. And then employment, you also referenced that, Rajeev too, is kind of the third leg of the stool where employment numbers were actually a little bit softer, but not really weak. I mean, they were weaker than last month, and they were some elements of weakness here and there. But they didn't fall off a cliff.
So you take those things together, none of which are really good. I mean, again, the treasury funding I think in particular is something we have to acknowledge that there's just a ton of borrowing going on by the federal government. Again, it's not quite as much as people thought. So again, it suggests that maybe bad news is it's not really bad or good, but it's not worse. It didn't grow as people thought it might or maybe as they feared. So again, the narrative I thought this week was Goldilocks and the three bulls. At the same time, I guess Steve, if we toss it over you, I mean, earnings were out this week and they weren't great either, but they weren't bad necessarily. We had a couple of big high-tech names, high profile tech names that were in the spotlight. So what was your takeaway from the earnings perspective this week?

Stephen Hoedt:
Well, George earnings this season have been underwhelming for the market in terms of the response that investors have had to them. However, they've been largely viewed as good enough. And I think that kind of the poster child for that, it was the Apple numbers this week. I think we've been focused on all the mega cap tech earnings as they've come through. They're very important for the market as in aggregate, they're about 30% of the S&P 500. And when you look at their earnings contribution, they also contribute an outsized percentage of earnings to the market. And in fact, even more growth.
So when you look at the numbers, Apple's numbers, they were okay, they weren't great. And they were impacted by some of the stuff that a couple of our colleagues talked about in a key question article earlier in the last month or so about China. So I think that there are things that are impacting those numbers. Again, they were good enough and clearly the market has a narrative right now where we're in the middle of a bounce. As far as I'm concerned though, the next mega cap tech number is really going to help tell the tail between how the market's going to perform between that period of time in the year-end, and that's Nvidia when they report on November 21st in the middle of the holiday week running into Thanksgiving and low liquidity conditions. So I'm going to be really focused on what happens with those numbers.
The whole AI theme has been something that the market really latched onto earlier in the year. It's kind of come off the boil over the last month or two as people have been focused on a different theme, which is GLP-1 kind of anti-obesity theme. So it's like we've got two themes that really have been taking primacy in the market so far this year in terms of giving people things to glom onto. And it's going to be interesting to watch what the Nvidia numbers have to say at the end of the month.

Brian Pietrangelo:
So Steve, we typically try to talk about everything under the sun in this podcast. So here's an unusual one that we typically don't talk about, but I'm going to throw it your way anyway. And that is the FTX scenario with Sam Bankman-Fried. What are your thoughts on that since it's making the news in terms of his recent guilty verdict in terms of the jury on his case?

Stephen Hoedt:
Yeah, it's been interesting to watch this as it's played out just from a fly on the wall perspective like all of us have. But I think that we currently don't have any recommendation on in the crypto space, obviously. And we've had comments out in white papers and other things about our thoughts there. But the one thing that comes across to me again, is one of those kind of timeless investing axioms. And that is if something looks like it's too good to be true, it probably is. And nothing comes more than that when you see Sam Bankman-Fried and the crypto FTX situation. Just a bad situation for investors, kind of a really sticky situation for the other folks involved. Too good to be true, probably it was.

Brian Pietrangelo:
Well, thanks Steve. So let's turn the last word over to George to give us his thoughts on general portfolio positioning and where we're headed for the future. George.

George Mateyo:
Geez, where we're headed for the future? That's a pretty big question for the last two minutes, I guess, Brian. But I think we'll just close that by again reminding people just where we've been positioned and why. We've been in the camp that we want to be neutral for a broad allocation perspective. Meaning if you think about your strategic weights towards major asset classes like stock and bonds, we kind of see the risk reward trade off pretty balanced between both at the moment. And that's kind of the reward of this year.
You could argue that the S&P 500 is probably doing a good bit better than the overall bond market. The bond market's had its struggles. But really the average stock performance has also been pretty weak too. So we feel like it's probably ... we're kind of content to be neutral towards duration as Cindy mentioned. We're kind of neutral towards risk in general, but we're finding things to do. I mean, we want to really be emphasizing quality in this environment. I think that's going to be a theme that's going to be rewarded going forward. We still see things slowing down a little bit, and I think that also kind of magnify the importance of quality into that environment as well.
So [inaudible 00:16:51] risk, and I think in the last few weeks or so, Brian, we've talked about the notion of dollar cost averaging into bonds. So for those people that might have excess cash in the sidelines, the bond market provides some opportunities that it hasn't had in the last two to three years in the sense that we now think that actually bonds can outperform cash by a pretty decent margin. And that's probably borne out this week, as well. So I think at the margin it's sticking your knitting, maintaining your policy positioning. And really kind of focusing on the long-term trends or things that we're really focused on here with inside the Wealth Management group at Key Private Bank.

Brian Pietrangelo:
Well, thanks for the conversation today, George, Steve, Rajeev and Cindy. We appreciate your insights. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app.
As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist or financial advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed. And provide those keys to help you achieve your financial success.

Speaker 6:
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