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What’s Fed Chairman Jerome Powell Thinking?

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Key Takeaways

  • Holiday Spending Uninspiring So Far
  • Housing Prices Fall
  • Jerome Powell Speaks

It’s been a relatively quiet start to the week for equities, but that could change. Economic data takes center stage as we move into the second half of the week. On Wednesday, we will get readings on GDP, job openings and perhaps most importantly, Federal Reserve Chair Jerome Powell speaks late in the day.

We’ve already received some data worth dissecting. Retail sales from Thursday through Sunday increased nearly 11% compared with last year. On average, shoppers spent 8% more over the long weekend than they did a year ago. However, with inflation running at just under 8%, that suggests a relatively sluggish start to the holiday shopping season. That could be the result of more spending conscious shoppers or it could also be because holiday sales began much earlier this year as retailers tried reducing excess inventory. I think we’ll need to wait on quarterly earnings before being able to effectively assess just exactly how retailers truly performed.

Housing data this week shows prices are down 1% compared with August and 3% over the last three months. I’ve pointed out before the relationship between housing and consumer spending. When housing prices are increasing, consumers are more confident in their spending because home equity is increasing. I think we’re already beginning to see the effect of falling home values in the retail sales data mentioned above and this is something I will continue monitoring.

The yield curve continues to be another interesting story. When yield curves invert, like they have been for much of this year, it’s often a warning sign of a possible recession. With short term rates higher than longer term rates, it signals investor concern about shorter term borrowing costs. This morning in premarket activity, the difference on two year yields vs. ten year yields is about .67 percentage points. Last week, that inversion reached .78, which is the widest it’s been since late 1981 just as a recession began that saw unemployment rates higher than that of the 2008 recession.

Speaking of jobs, we’ll get the new JOLTS number which will give us a read on existing job openings. Markets are looking for that number to come in at 10.3 million, down slightly from last month’s 10.7 million. That number, along with Wednesday’s ADP private payrolls report will give us a better idea of what to expect when Friday’s employment report is released.

All of this adds to the importance when Jerome Powell speaks on Wednesday. Like I mentioned earlier this week, a number of members of the Fed have lightened up a bit on hawkish statements regarding raising interest rates. As of Wednesday morning, markets are anticipating a half-point increase in rates when the Fed meets two weeks from today. Therefore, I’ll be paying close attention to any hints Powell offers as to where he sees rates headed.

Finally, this is the last day of the month and that can mean potential volatility for stocks as fund managers rebalance portfolios. Since hitting a high of nearly 35 in late September, the VIX has been steadily falling. On Tuesday, VIX closed at 21.89. But I wouldn’t make the mistake of getting lulled to sleep right now. A couple times now we’ve seen this market rally and volatility fall only to reverse course. Therefore, I would continue sticking with your investment plan and time horizon. Consistent mechanics are how traders avoid getting caught up in day-to-day market gyrations and second guessing decisions.

tastytrade, Inc. commentary for educational purposes only.

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