In a recent commentary (“The 50-Basis-Point Cut”), I suggested that we would be in for a period of substantial market volatility, and it is likely to continue until the path that the FOMC is going to take becomes more clear. That prediction has been realized. The Dow Jones Index, for example, peaked at 43,275 on October 18 – up from its low in the month of 41,954 on October 7 – and as of this writing stands at 42,723, which is down 552 points from its high. The most recent drop, on Tuesday, October 22, has been attributed to rate increases in the bond market and increased uncertainty in response to comments from several Federal Reserve bank presidents, including presidents Bostic and Kashkari, that they are prepared to take a more cautious approach to further rate cuts. President Bostic, for example, saw only one rate cut through the rest of the year as likely, given the need to be sure that inflation continues on its downward path.
Incoming data clearly suggest that the labor market remains relatively strong. The chart below shows new claims steady in the 220,000–236,000 range, and the unemployment rate has edged down slightly to 4.1%. Inflation has edged down to 2.2% in August, down from 2.5% in July.
A new data release is scheduled for Oct 31, and we will get new information on job creation on Friday, October 25. We have entered the earnings reporting season for Q3, and firms are reporting strong earnings for the quarter so far, including GM, which has revised up its earnings projection ahead of its actual release. Further indication of a firm Q3 is contained in the GDP Now forecasts of the FRB New York and Atlanta. On October 18, the New York Fed predicted GDP at 3.0% while the Atlanta Fed saw GDP at 3.4% on that same day. We will get new data on jobs for October on November 1, which will follow the extremely strong close-out of Q3 with 254,000 new jobs created in September. That number helped propel the Dow up before its recent decline.
So now, pending data through the rest of this week on Q3 earnings, the markets will be faced with assessing how strong Q3 was or was not and how to react to the flow of new earnings as a means of assessing how to price equities. We can continue to expect more volatility until after the FOMC meeting on November 6–7.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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