To Hike or Not To Hike.

October 2023 Economic Review

Economic data continues to make the Fed’s job challenging as we enter the last two meetings of the year. Inflation was slightly hotter than we expected in September with CPI increasing 3.7% from a year prior and increasing 0.4% quarter over quarter. While the pace of inflation slowed from its recent August high, the numbers suggest that the Fed may still have work to do to tackle prices.  

Shelter and energy prices were the main catalysts for September’s inflation reading as rent and home prices bucked the trend and showed an acceleration. A surge in energy prices felt during September led to an 8.5% increase from the quarter prior which was already on top of August’s 9.1%. Core inflation, which strips out the volatile food and energy segments, reached a two-year low which is positive considering it is the Fed’s preferred gauge. However, with core inflation still above the Fed’s 2.0% level, CPI above its June low, and unemployment below 4.0%, the Fed may still have some work to do.  

The U.S. consumer has displayed consistent strength despite the high inflation which we believe has been boosting the economy along with the low unemployment rate. However, we note that there is evidence that this could be beginning to shift. Consumer sentiment via the University of Michigan Index has declined for three months in a row now (though it is higher than a year ago), and consumer savings have also been on a 3-month decline since May. Credit card usage is also accelerating which can flow through to credit quality at the banks.   

To cap it all off, geopolitical tensions have again flared with the recent escalation in Israel which has the ability to destabilize the economic outlook globally. At home, a prolonged fight for the Speaker of the House could push Congress up against its funding deadline again in November leading to a potential shutdown. The market now only places a 25% chance on another rate hike this year, and with all the conflicting forces in the U.S. economy right now, what the Fed chooses to do next is anyone’s guess.

Current Economic Releases
Data Period Value
GDP QoQ Q2 ’23 2.10%
US Unemployment Sep ’23 3.80%
ISM Manufacturing Sep ’23 49.0
PPI YoY Sep ’23 2.20%
CPI YoY Sep ’23 3.70%
Fed Funds Target Oct 13, 2023 5.25% – 5.50%
Treasury Yields
Maturity 10/12/23 9/13/23 CHANGE
3-Month 5.343% 5.448% -0.106%
6-Month 5.560% 5.521% 0.039%
1-Year 5.395% 5.396% -0.001%
2-Year 5.069% 4.969% 0.099%
3-Year 4.846% 4.645% 0.201%
5-Year 4.692% 4.384% 0.309%
10-Year 4.697% 4.249% 0.448%
30-Year 4.854% 4.343% 0.511%
Agency Yields 
Maturity 10/12/23 9/13/23 CHANGE
3-Month 5.505% 5.509% -0.004%
6-Month 5.553% 5.533% 0.021%
1-Year 5.489% 5.443% 0.047%
2-Year 5.151% 5.012% 0.139%
3-Year 4.952% 4.733% 0.219%
5-Year 4.815% 4.487% 0.329%
Commercial Paper (A1/P1)  
Maturity 10/12/23 9/13/23 CHANGE
1-Month 5.360% 5.360% 0.000%
3-Month 5.580% 5.500% 0.080%
6-Month 5.760% 5.760% 0.000%
9-Month 5.810% 5.820% -0.010%

Source: Bloomberg. Data as of October 12, 2023. Data unaudited. Many factors affect performance including changes in market conditions and interest rates and in response to other economic, political, or financial developments. Investment involves risk including the possible loss of principal. No assurance can be given that the performance objectives of a given strategy will be achieved. All comments and discussions presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.