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Perspective: Morning Commentary for October 29

Mike Castle
Mike Castle

Market Intelligence - Fertilizer Analyst

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October 29 – The Fed held steady as expected yesterday, though it’s worth noting that this was not a unanimous vote, with two dissenters in favor of a hike due to stubborn above-target inflation. Given the widespread expectations that rates would be held steady, the more notable takeaways came from Fed Chair Kevin Warsh’s subsequent press conference; while he has been very explicit in his preference for providing less forward guidance, the market will always parse through these comments with a fine-tooth comb in an attempt to glean insight into what lies ahead. Overall, Warsh delivered a modestly hawkish message after leaving rates unchanged, describing economic growth as strong, labor markets as healthy, and inflation as still unacceptably high. While acknowledging that financial conditions have tightened since September, Warsh said he was “unwilling and unable to call them tight,” reinforcing the view that the Fed has more work to do ahead. The press conference kept the door open to another rate hike should incoming data remain firm, with the policy statement noting: “the accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee's 2% goal.” CME’s FedWatch continues to point to overwhelming expectations (~83%) of a 25-basis point hike coming at the Fed’s December meeting but clearly will remain data dependent with much intrigue over these next six weeks.

Warsh also floated reducing the frequency of scheduled FOMC meetings beginning in 2027, arguing that policymakers should spend more time focused on strategic issues and less time reacting to each economic data release. The proposal would be for the FOMC to trim their number of interest rate decisions from the current eight per year down to seven in 2027 and six in 2028, with the other meetings being used purely for strategy. This fits well with the reforms that Kevin Warsh has been pushing for in his early tenure, emphasizing his desire for the Fed to fade more into the background rather than be the focus of the market. While the change would not limit the Fed's ability to respond during periods of stress, the proposal was viewed as an institutional reform rather than a signal of any near-term shift in monetary policy.

Stock futures are pointing to a mostly lower open, with the tech heavy Nasdaq seeing the largest drag amid a notable gap lower in Google parent Alphabet’s stock after yesterday’s closely watched third quarter earnings release. Alphabet missed earnings and revenue estimates, reported negative free cash flow, and warned that capital spending will increase significantly again in 2027, raising investor concerns about how quickly massive AI investments will generate returns. However, this contrasted notably with results from Microsoft, beating headline earnings expectations and showing a notable surge in Azure cloud growth, with revenue up 48% year-on-year. The contrasting results suggest markets are becoming more selective, rewarding companies that can demonstrate clear AI monetization while growing less tolerant of heavy spending without a corresponding payoff. The market will get another round of excitement with Amazon due to report after today’s close, with investors looking for demonstration of AI-driven revenue growth being able to keep pace with the surge in AI-related capital expenditures. The VIX is quietly higher after dipping to a nearly two-week low yesterday, hanging near 17.2 at the time of writing. The dollar is just on the positive side of unchanged to start the day, trading near 1022.22 as traders assess Fed expectations. Treasury yields are modestly lower this morning, with 2-year yields at 4.712%, 10-year yields at 5.032%, and 30-year yields at 5.353%. Crue oil prices are off to a quiet start as traders await the next headline regarding Middle East diplomacy or escalation, as nearby WTI hangs 0.2% lower to trade at $101.75 and nearby Brent hangs 1% lower to trade at $110.50. The ags are mostly lower at the break, led down by soybeans.

First-time claims for unemployment benefits fell to 194k in the week ending October 24, well below the average analyst estimate of 199k and now showing a slight decline from the week prior’s upwardly revised 195k (originally reported at 194k), while also marking a 14-week low. This dragged the four-week moving average for initial claims down to 196.75k, representing the lowest level seen for this series since October 1969, underscoring the unexpected strength of the labor market. Continuing jobless claims unexpectedly dropped to 1.701M, sharply below the average analyst estimate for a modest decline to 1.720M and well below the lowest estimate of 1.715M. In fact, this was the lowest level of continuing claims since early April 2023, further pointing to a tighter-than-expected U.S. labor market, giving further permission to the Fed to continue on their path of moving rates higher to combat rising inflation.

Headline PCE inflation accelerated to 3.6% in September, up from 3.4% in August and marking the highest print since May, though this matched the average analyst estimate. In month-on-month terms, this was a 0.5% rise, again matching analyst estimates but representing the hottest since March. Stripping out the more volatile energy and food prices, core PCE inflation rose 0.3% month-on-month and 3.1% year-on-year; both matching the average analyst estimate as well. That’s steady with August on the monthly gain but the hottest print since May on the yearly gain. While this was certainly not a blowout print by any means, it does continue to paint a picture of inflation moving in the wrong direction, further supporting the Fed’s hawkish case. With this being the final September inflation reading, more intrigue is added to the October data, with October CPI and PPI due out the week after next.

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Perspective: Morning Commentary for October 29

October 29 – The Fed held steady as expected yesterday, though it’s worth noting that this was not a unanimous vote, with two dissenters in favor of a hike due to stubborn above-target inflation. Given the widespread expectations that rates would be held steady, the more notable takeaways came from Fed Chair Kevin Warsh’s subsequent press conference; while he has been very explicit in his preference for providing less forward guidance, the market will always parse through these comments with a fine-tooth comb in an attempt to glean insight into what lies ahead. Overall, Warsh delivered a modestly hawkish message after leaving rates unchanged, describing economic growth as strong, labor markets as healthy, and inflation as still unacceptably high. While acknowledging that financial conditions have tightened since September, Warsh said he was “unwilling and unable to call them tight,” reinforcing the view that the Fed has more work to do ahead. The press conference kept the door open to another rate hike should incoming data remain firm, with the policy statement noting: “the accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee's 2% goal.” CME’s FedWatch continues to point to overwhelming expectations (~83%) of a 25-basis point hike coming at the Fed’s December meeting but clearly will remain data dependent with much intrigue over these next six weeks.

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