No Tricks or Treats from the Fed

Fed Holds, Flight to Safety Helps

As expected, the Federal Reserve (Fed) left its Fed Funds target rate unchanged. The press conference didn’t shed much light on future rate direction. This was good news for mortgage rates, as they have continued to improve on a sustained flight to safety.

Remember, when stocks become more volatile, investors will sell them and put their money into less risky asset classes like U.S. Treasury bonds and mortgage-backed securities. This is called a risk-off trade or a flight to safety.

Tech Earnings Rattle Stocks

Contributing to the risk in the stock market were several tech companies’ quarterly reports. Amazon missed both its revenue target and earnings-per-share estimate. Both Amazon and Alphabet (parent company of Google) had negative free cash flow. That is their operating cash flow minus their capital expenditures—a fancy way of saying they are spending more than they are taking in from running their businesses.

Alphabet came in at negative $9.1 billion, a massive cash flow crunch. This caused its shares to sell off nearly 13%, their worst day ever, shedding almost $500 billion in value in one day. Intel also gave weak guidance for the future. This allowed mortgage rates to improve and get closer to where they were prior to the run-up in mid-September.

Fed Vote: Dissents and Schedule Changes

The Fed meeting saw a 10-to-2 vote to leave its interest rate target unchanged. The two dissenters, who wished to hike rates, were interesting: Beth Hammack, a Fed president, will no longer be a voting member next year since the presidents rotate off, but Lisa Cook, a Fed governor, remains a permanent voting member.

Lisa Cook is, based on her writings and prior history, a rather dovish member (one who tends to favor rate cuts). Since she voted to hike, there is speculation that this dissent is due to political reasons, as U.S. President Trump has called for her firing.

One big change to the Fed was announced. It will move to six annual policy meetings by 2028 versus the eight it currently holds. It will still have two additional strategy meetings, but rate decisions will not occur at them.

PCE: Annual Core Inflation Edges Higher

The Personal Consumption Expenditures (PCE) report for September was released this week. It showed headline inflation rose 0.5%, as expected. Core PCE, stripping out volatile food and energy prices, rose 0.3%, as expected. Year over year, core inflation rose from 3% to 3.1%.

GDP: Stronger Growth, Lower Inflation

The GDP report was also released this week. Q3 GDP came in at 3.4%, up from 2.2% in Q2 and above the 3.2% estimate. Strong growth like this is normally bad news for bonds and should have pushed rates higher. The fact that rates improved anyway shows just how much fear the market has about what is coming in AI and tech.

The quarterly inflation figures from that same report may have gotten some market attention. Q3 PCE inflation rose 2.1%, down sharply from 5% in the prior quarter. A dark spot in the report for the economy is that the savings rate fell from 4% to 3.8%, the lowest in nearly four years.

Looking Ahead: Jobs Report and Midterm Elections

Next week is jobs week, with the ultra-important BLS Jobs Report and U.S. midterm elections: Monday, November 2 – ISM Manufacturing Index.

• Tuesday, November 3: JOLTS (Job Openings and Labor Turnover), Election Day
• Wednesday, November 4: ADP Employment, ISM Non-Manufacturing Index
• Thursday, November 5: Productivity and Unit Labor Costs, Jobless Claims
• Friday, November 6: Bureau of Labor Statistics (BLS) Nonfarm Payrolls (Jobs Report), University of Michigan Consumer Sentiment