‘Avoid crazy at all costs’ –– Charles Munger

1. Fed’s Waller, Bowman Open Door to Another Interest Rate Pause in December — Two Federal Reserve officials who led the push for higher interest rates to curb inflation last year signaled they could be comfortable holding rates steady for now, reinforcing expectations that the central bank’s current hiking cycle is done. While the remarks don’t fundamentally change expectations for the Fed’s December meeting, Waller’s comments in particular suggest support is widening among officials for an extended policy pause amid signs that economic activity, inflation and the labor market are cooling.
2. U.S. GDP grew at a 5.2% rate in the third quarter, even stronger than first indicated — Gross domestic product, a measure of all goods and services produced during the three-month period, accelerated at a 5.2% annualized pace, the department’s second estimate showed. The acceleration topped the initial 4.9% reading and was better than the 5% forecast from economists polled by Dow Jones. Primarily, the upward revision came from increases in nonresidential fixed investment, which includes structures, equipment and intellectual property. The category showed a rise of 1.3%, which still marked a sharp downward shift from previous quarters.
Government spending also helped boost the Q3 estimate, rising 5.5% for the July-through-September period.
However, consumer spending saw a downward revision, now rising just 3.6%, compared with 4% in the initial estimate.
3. Fed’s favorite gauge shows inflation rose 0.2% in October and 3.5% from a year ago, as expected — the personal consumption expenditures price index, excluding food and energy prices, rose 0.2% for the month and 3.5% on a year-over-year basis, the Commerce Department reported. Both numbers aligned with the Dow Jones consensus.
Headline inflation was flat on the month and at a 3% rate for the 12-month period, the release also showed. Energy prices fell 2.6% on the month, helping keep overall inflation in check, even as food prices increased 0.2%.
Goods prices saw a 0.3% decrease while services rose 0.2%. On the services side, the biggest gainers were international travel, health care and food services and accommodations. In goods, gasoline led the gainers.
Personal income and spending both rose 0.2% on the month, also meeting estimates and indicating that consumers are keeping pace with inflation.

The week ahead — Economic data from Econoday.com:

1. Home Sales Fell to a New 13-Year Low in October — Home-buying affordability sits near its lowest level in decades, pushing many buyers out of the market. Existing-home sales for the full year in 2023 are on track to be the lowest since at least 2011, according to economist forecasts.
Existing-home sales, which make up most of the housing market, decreased 4.1% in October from the prior month to a seasonally adjusted annual rate of 3.79 million, the lowest rate since August 2010, the National Association of Realtors said Tuesday. October sales fell 14.6% from a year earlier. Sales have been near 2010 levels in recent months.

Here is the market recap for the week
Sector Performance

Most sectors of the market were higher last week, with technology and communication services stocks leading the gains. The technology sector rose 2.1%, while the communication services sector advanced 1.9%. Other sectors that performed well included financials (up 1.3%) and consumer discretionary (up 1.2%).

Notable Developments

— In addition to the factors mentioned above, there were a few other notable developments in the market last week:
— Fed’s monetary policy outlook: Comments from Federal Reserve officials last week suggested that the Fed may be nearing the end of its rate-hiking cycle. This news was seen as positive for the market.
— Geopolitical tensions: Geopolitical tensions remained elevated last week, but they did not appear to have a significant impact on the market.

The week ahead — Economic data from Econoday.com:

I know where I’m getting out before I get in. — Bruce Kovner

1. US Inflation Broadly Slows, Erasing Bets on More Fed Rate Hikes — The so-called core consumer price index, which excludes food and energy costs, increased 0.2% from September, according to government figures. Economists favor the core gauge as a better indicator of underlying inflation than the overall CPI. That measure was little changed, restrained by cheaper gasoline. The Bureau of Labor Statistics figures reflected increases in rent and personal-care products and services, as well as health insurance due to a methodological change in how the government calculates it. Meanwhile, airfares and used-car prices declined.
Shelter prices, which make up about a third of the overall CPI index, climbed 0.3%, half the prior month’s pace. Economists see a sustained moderation in this category as key to bring core inflation down to the Fed’s target. A key measure of rent as well as hotel stays stepped down.
Excluding housing and energy, services prices climbed 0.2% from September and 3.7% from a year ago — the lowest in nearly two years — according to Bloomberg calculations. While Powell and his colleagues have stressed the importance of looking at such a metric when assessing the nation’s inflation trajectory, they compute it based on a separate index.
2. US Producer Prices Decline by Most Since April 2020 on Gasoline — The producer price index for final demand decreased 0.5% from a month earlier, a sharp slowdown that’s largely reflective of a decline in gasoline prices. Excluding food and energy, the so-called core PPI was unchanged, government data showed.
From a year ago, the overall measure was up 1.3%, while the core gauge posted the smallest annual increase since the start of 2021. Over 80% of the decrease in goods prices was due to a 15.3% slump in the cost of gasoline, the government report. Services costs, meanwhile, were flat after rising six straight months.

The week ahead — Economic data from Econoday.com:

“Do not SELL lower low, Do not BUY lower high”

1. China’s Exports Tumble Again in Fresh Sign of Economic Trouble — China’s exports fell for the sixth straight month, adding to pressure on Beijing to boost spending at home as a big rise in global interest rates and wars in Ukraine and the Middle East weigh on the world economy. Chinese exports fell 6.4% in October compared with a year earlier, to $275 billion, China’s General Administration of Customs said Tuesday, a steeper decline than the 6.2% fall recorded in September. Diminishing exports show global demand for Chinese goods is subdued as consumers and businesses contend with slowing growth and higher borrowing costs. Other Asian export powerhouses, such as South Korea and Taiwan, have also reported months of feeble overseas sales.
2. Citrix Owner Becomes Latest U.S. Company to Retreat From China — Cloud Software Group, which owns enterprise-software brand Citrix, is ceasing business transactions in China, becoming the latest U.S. company to pull back from China. Cloud Software Group is the latest U.S. technology company to withdraw or significantly shrink its business operations in China as the economy slows and national-security and data-related concerns grow.
This year, Microsoft’s LinkedIn closed down its China-focused jobs app, following its exit from its social-media business in the country. Salesforce shifted to a model in which it relies on a local partner to operate some of its products and services in China. It also laid off staff in mainland China and Hong Kong and closed its Hong Kong office, The Wall Street Journal reported.
3. Jerome Powell Outlines Cautious Approach to Raising Rates or Declaring End to Hikes — Fed Chair Jerome Powell said it was premature for the central bank to declare a conclusive end to its historic interest-rate increases of the past two years even though he didn’t make an argument for raising rates further right now. The Fed has raised interest rates this year to a 22-year high to combat inflation by slowing economic activity. Officials are committed to achieving a rate setting that is “sufficiently restrictive” to bring inflation down to its 2% goal over time. “We are not confident that we have achieved such a stance,” Powell said in remarks prepared for delivery at a conference in Washington on Thursday. Powell said officials would monitor economic conditions closely to avoid the risk of having raised rates too high and the risk of having been “misled by a few good months of data.”
4. US Credit-Rating Outlook Changed to Negative by Moody’s — the rating assessor lowered the outlook to negative from stable while affirming the nation’s rating at Aaa, the highest investment-grade notch. Amid higher interest rates, without measures to reduce spending or boost revenue, fiscal deficits will likely “remain very large, significantly weakening debt affordability,” Moody’s said. Moody’s is the only of the three main credit companies with a top rating on the US after Fitch Ratings downgraded the US government in August following the latest debt-ceiling battle. S&P Global Ratings stripped the US of its top score in 2011 amid that year’s debt-limit crisis.

The week ahead — Economic data from Econoday.com:

1. Fed Extends Pause on Interest-Rate Hikes but Keeps Door Open to Higher Rates — The Federal Reserve left interest rates unchanged at a 22-year high and signaled rates would remain elevated well into next year to keep inflation moving down. At the September meeting, most central-bank officials projected one more rate increase this year, but some have spoken in recent weeks as though they aren’t eager to hike again unless hotter-than-expected economic data force them to. That is a change from earlier this year, when they were more concerned about tightening too little. Officials have been trying to balance two risks. They don’t want to overdo rate rises to avoid causing an unnecessarily severe downturn. They also don’t want to allow inflation to reaccelerate or to settle at levels well above their 2% target. “We’re getting to a place where the risks are closer to being in balance,” Powell said.
2. US Productivity Grows by Most Since 2020, Labor Costs Decrease — US labor productivity advanced by the most in three years, helping to alleviate the inflationary impact of recent wage growth. Productivity, or nonfarm business employee output per hour, rose at a 4.7% annualized rate in the third quarter after climbing 3.6% in the prior period, data from the Bureau of Labor Statistics showed late last week.
Unit labor costs, or what a business pays employees to produce one unit of output, decreased at a 0.8% rate after climbing 3.2% in the second quarter. It marked the first decline since late 2022. Quarterly productivity figures are quite volatile, but overall, the back-to-back advances suggest companies are stepping up efforts to improve efficiency. Despite high borrowing costs, business investment has held firm, supporting long-term economic growth.
3. Sharp U.S. Hiring Slowdown Signals Cooling Economy Ahead — Employers added 150,000 jobs in October, half the prior month’s gain and the smallest monthly increase since June, the Labor Department said Friday. The unemployment rate rose to 3.9%, up a half-point since April, and wage growth slowed. The figures are likely to bring the Federal Reserve’s historic interest-rate increases to an end by providing stronger evidence that higher borrowing costs have slowed the economy. The report could also mollify concerns that brisk consumer spending this summer would lead hiring or wages to reaccelerate.
4. Tech Giants Spend Billions on AI Startups—And Get Just as Much Back — Amazon, Google and Microsoft have spent the past year investing billions of dollars in artificial-intelligence startups—while also charging those fledgling companies a similar amount to use their cloud platforms. The deals are making the big tech firms the largest backers and most direct beneficiaries of these startups, reflecting how some of the AI boom’s biggest rewards keep going to the most powerful players. The value of the tech giants’ stakes could shoot up if the startups take off. And if not, they still will have turned chunks of cash into revenue.

The week ahead — Economic data from Econoday.com:

There will not be any re-cap for the week of Oct 23rd through Oct 27th, 2023. We are away for some needed R&R.

The staffs at EGS.

The week ahead — Economic data from Econoday.com:

“If you can keep your wits about you while all others are losing theirs, and blaming you. The world will be yours and everything in it…” — Rudyard Kipling

1. Retail sales rose 0.7% in September, much stronger than estimate — Retail sales rose 0.7% on the month, well above the 0.3% Dow Jones estimate, according to the advance report the Commerce Department released Tuesday. Gas station sales helped propel the headline number, rising 0.9% as prices at the pump accelerated.
Excluding autos, sales were up 0.6%, also well ahead of the forecast for just 0.2%. The so-called control group, which strips out items such as auto dealers, gas stations, office supply stores, mobile homes and tobacco stores and is used for the department’s GDP calculation, rose 0.6% as well. Sales gains were broad-based on the month, with the biggest rise coming at miscellaneous store retailers, which saw an increase of 3%. Online sales climbed 1.1% while motor vehicle parts and dealers saw a 1% increase and food services and drinking places grew by 0.9%, good for a yearly increase of 9.2%, which led all categories.
2. US Existing-Home Sales Sink to Lowest Level Since 2010 — Sales of previously owned US homes fell in September to the lowest level since 2010 as affordability worsened even further. Contract closings decreased 2% from a month earlier to a 3.96 million annualized pace, National Association of Realtors data showed Thursday. The median estimate in a Bloomberg survey of economists called for a reading of 3.89 million. The resale market remains historically depressed under the weight of decades-high mortgage rates. Not only are prospective buyers discouraged, but homeowners who previously locked in lower mortgage rates have no incentive to move, putting pressure on inventories and therefore prices.
3. The 10-Year Treasury Yield Came Close to 5% — The 10-year yield was down 0.05 percentage point on Friday, to 4.94%, after closing at 4.99% on Thursday then pushing closer to 5% in overnight trading. The yield has climbed 1.2 percentage points since July alone, as investors have increasingly priced in the likelihood that the Federal Reserve will lift interest rates higher than expected and leave them there longer. Data showing strength in the labor market, retail sales, and elsewhere in the economy have lifted expectations for inflation, prompting investors to factor in tighter monetary policy later into 2024. The higher yields on offer today are an attractive opportunity for investors looking for some greater risk-free income, but reaching them has been painful for those already holding bonds in their portfolios. Bonds’ prices fall as their yields rise.
4. Jim Jordan Is Removed as GOP Nominee After Third Loss in Speaker Vote — Rep. Jim Jordan was ousted as the GOP’s nominee to be House speaker, as colleagues voted to start over fresh next week after the fiery Ohio conservative failed for the third time to win a majority on the House floor. Jordan has faced opposition from GOP colleagues worried about how he would manage spending talks and avoid a government shutdown; allies of other party leaders who were pushed aside in favor of Jordan; and moderates from Democratic-leaning regions who see him as too stridently conservative.

The week ahead — Economic data from Econoday.com:

“ be fearful when others are greedy and to be greedy only when others are fearful.” — Warren Buffett

1. Producer Prices Came in Slightly Hotter than Expected — The producer-price index increased 0.5% from the prior month, a slowdown from August’s 0.7% increase, but still above economists’ expectations for 0.3% growth, according to FactSet. Excluding food and energy, core producer prices rose 0.3% for the month, slightly above expectations for a 0.2% gain. Leading the increase in September were prices for final demand goods, which increased 0.9%, and services, which were up 0.3%. For final demand goods, the increase can be attributed to higher energy prices, including a 5.4% rise in the index for gasoline.
2. Fed Minutes Show Officials Divided on Future Rate Rise — Federal Reserve officials were split over whether they would need to raise interest rates again this year when they decided last month to hold their benchmark policy rate steady. Officials most recently raised their benchmark federal-funds rate in July to a range between 5.25% and 5.5%, a 22-year high. They began lifting rates from near zero in March 2022. A run-up in long-term Treasury yields that began in August accelerated after last month’s meeting. If sustained, the rise in yields could moot the need for Fed officials to raise rates again this year. Economic projections released last month showed most officials had penciled in one more rate rise this year. But they made those projections before a further jump in long-term yields, which is raising rates on mortgages, auto loans and business debt.
3. US Consumer Prices Rise at Brisk Pace for Second Straight Month — The so-called core consumer price index, which excludes food and energy costs, increased 0.3% in September, Bureau of Labor Statistics data showed Thursday. Economists favor the core gauge as a better indicator of underlying inflation than the overall CPI. That measure climbed 0.4%, boosted by energy costs. Recent inflation data underscore how a strong labor market is underpinning consumer demand, which risks keeping price pressures above the Fed’s target. At their meeting last month, a majority of officials saw a need for one more interest rate hike this year, and they may maintain that bias — despite a recent surge in bond yields — if inflation doesn’t cool further.
4. JPMorgan Posts Big Earnings Beat, Setting Bar High for Other Banks — JPMorgan Chief Executive Jamie Dimon celebrated the results but also urged caution amid a challenging macroeconomic and geopolitical backdrop, which includes quantitative tightening and wars in Ukraine and Israel. Bank stocks have been punished this year as rapidly rising interest rates have caused many problems for lenders. At first, banks could delight in the fact that higher rates allowed them to earn more interest on the loans they issue. But high rates also have the tendency to keep potential borrowers on the sidelines and pressure current borrowers into delinquencies. The jump in rates has also meant savers now have more options for where to park their nest eggs and earn yield, putting pressure on banks’ funding costs.

The week ahead — Economic data from Econoday.com:

‘Buy On The Cannons, Sell On The Trumpets’ — NICHOLAS VARDY

1. Hiring Accelerated With 336,000 Jobs Added Last Month — Employers added 336,000 jobs in September, the strongest gain since January and up sharply from the prior month’s upwardly revised 227,000 gain, the Labor Department said Friday. Job growth was also stronger in July than previously estimated. The unemployment rate held steady at 3.8% last month, near historically low levels. Employers raised pay at a solid pace as they competed for a limited pool of workers. Average hourly earnings rose 4.2% in September from a year earlier, down slightly from 4.3% in August. That was slower than last year but well above the prepandemic rate.
2. UAW Forgoes Additional Walkouts For Now, Citing Progress in Talks — The head of the United Auto Workers said Detroit’s automakers would be spared additional walkouts Friday, citing progress made in negotiations with all three companies. The UAW’s ongoing strike—the first to hit all three automakers simultaneously in the union’s 88-year history—enters its fourth week with about 25,000 factory workers on picket lines across five assembly plants and dozens of parts-distribution centers at GM GM 1.95%increase; green up pointing triangle, Ford and Stellantis. Fain had called additional work stoppages at facilities across the companies’ operations for three straight weeks.
While the issues of wage increases and retirement benefits are central in the negotiations, the automakers’ plan to collectively spend billions of dollars on new U.S. battery plants has hung over the talks. Union leaders have said they want those factories to be unionized, in part because of concerns about job losses or reduced wages as the companies transition to electric vehicles.
3. Biden Administration to Resume Border Wall Construction in Policy Reversal — in a public notice posted Wednesday, the Department of Homeland Security outlined its intent to build up to 20 new miles of Trump administration-era border barriers in the Rio Grande Valley of Texas, one of the busiest crossing spots for migrants attempting to enter the U.S. The about-face by the administration—which halted all border-wall construction on the first day of Biden’s presidency—shows its increasing desperation to tamp down illegal border crossings, which have surpassed two million for each of the last two years.
4. Kaiser Permanente Employees Enter Second Day of Largest Healthcare Strike — the largest health care strike in US history is now in its second day after more than 75,000 Kaiser Permanente workers began walking off the job on Wednesday. The striking employees, who work across California, Colorado, Washington and Oregon, are represented by a coalition of unions that comprise 40% of Kaiser Permanente’s staff. Nearly 200 workers from Kaiser facilities in Virginia and Washington, DC, joined the picket lines for a single day on Wednesday, as well. The union coalition is demanding higher pay among other benefits, including a strategy to fix a chronic staff shortage that workers say has left them overworked and burnt out, especially in the wake of the pandemic. Employees in a wide array of roles at Kaiser are on strike, including nursing staff, dietary workers, receptionists, lab technicians, and pharmacists.

The week ahead — Economic data from Econoday.com:

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” ― Warren Buffett

1. Standoff in Congress Brings Government to Brink of Shutdown — House Speaker Kevin McCarthy (R., Calif.) rebuffed a bipartisan short-term funding bill from the Senate in favor of a House Republican plan driven by conservatives, as dim prospects for a deal raised the likelihood of a partial government shutdown starting this weekend.
Many lawmakers now anticipate that Congress will fail to fund the government past Sept. 30, a lapse that will partially close federal agencies and temporarily withhold pay for federal workers and active duty-military personnel. Both the House and Senate are moving ahead with their own stopgap proposals intended to keep the government open while work continues on full-year funding legislation. Each plan is considered a nonstarter in the other chamber, however, with sharp differences on spending levels, Ukraine and border security.
2. UAW Threatens More Strikes as GM, Stellantis Try to Keep Repair Parts Flowing — the United Auto Workers union pledged to widen its strike on Friday barring significant progress in talks with Detroit carmakers, as the companies take steps to keep critical parts flowing to their dealerships. Parallel talks between the UAW and General Motors, Ford Motor F -0.32%decrease; red down pointing triangle and Chrysler-parent Stellantis STLA -0.16%decrease; red down pointing triangle continued, a union official said Wednesday, nearly two weeks into a limited strike at all three automakers. The UAW official said the union would identify new strike targets at 10 a.m. Friday, with walkouts to begin at noon, unless bargainers make headway in negotiations for new four-year contracts. Last week, the UAW expanded the strike beyond three assembly plants—one at each company—to include 38 parts-distribution centers owned by GM and Stellantis. The union spared Ford from more walkouts, saying it was making progress in contract talks with the automaker.
3. Underlying Prices Cooled in August, Giving the Fed More Evidence of Softer Inflation — the Fed’s preferred inflation gauge, the personal-consumption expenditures price index, rose a seasonally adjusted 0.4% last month, largely reflecting energy costs. Core prices, which exclude food and energy, rose just 0.1% in August, the weakest monthly increase since 2020, the Commerce Department reported.
Over the three months through August, core prices rose at a 2.2% annualized rate. If that trend continues in the coming months, inflation would be running very close to the Fed’s 2% target. But higher energy prices pushed up overall inflation last month, highlighting why officials aren’t ready to declare victory.
4. UAW Expands Strike to GM Plant in Michigan, Ford Factory in Chicago — UAW President Shawn Fain said during a livestream address Friday that Chrysler-parent Stellantis STLA -0.73%decrease; red down pointing triangle would be spared from further walkouts for now, saying the company delivered a proposal that made significant progress on the union’s demands, including cost-of-living adjustments. The new walkouts would add nearly 7,000 workers to the roughly 18,000 UAW members on strike across the three companies, at three assembly plants and dozens of parts-distribution facilities. The Detroit companies combined have about 146,000 union workers.
5. McCarthy’s Bill to Avoid Government Shutdown Defeated in House — the bill failed in the Republican-led House with 198 in favor and 232 against, with 21 GOP lawmakers joining all Democrats in voting No. The defeat marked the latest embarrassing floor setback for McCarthy and underscores the bind facing GOP leadership. With a narrow 221-212 Republican majority in the House, McCarthy has repeatedly crafted legislation to win over the hard-line conservatives in his conference—only to see the bills fail anyway. The intraparty deadlock has left Republicans with no clear path forward, sidelined any talks with Democrats and put McCarthy’s job at the top of the party in peril. The McCarthy proposal would have extended government funding through Oct. 31, but at a $1.471 trillion annual rate, down from $1.6 trillion in fiscal 2023. The bill also included strict new border-security measures and the creation of a fiscal commission charged with coming up with ways to balance the budget and improve the country’s fiscal outlook.

In addition to the above events, the following economic data releases also had an impact on the market last week:

— ISM Manufacturing PMI: The ISM Manufacturing PMI for September was 49.8, below the consensus forecast of 50.2. This suggests that the manufacturing sector is contracting.
— ISM Services PMI: The ISM Services PMI for September was 53.6, above the consensus forecast of 53.2. This suggests that the services sector is still expanding, although at a slower pace than in previous months.
— Nonfarm payrolls: The US economy added 170,000 jobs in September, below the consensus forecast of 187,000. However, the unemployment rate remained at 3.7%, its lowest level since 1969.