The market has spoken: the Fed is done raising rates.

• The U.S. Federal Reserve held rates steady, but its speech was seen as an admission that hikes are over. The market was happy: stocks and bonds rallied.
• Manufacturing came in weaker than expected in the U.S., but was it only because of the auto makers’ strikes?
• The United States broke oil production records, much to the dismay of OPEC+.

U.S. Federal Reserve Chair Jay Powell seems finished with rate hikes — at least that's the market's conclusion after his speech on Wednesday. Treasury yields fell, particularly at the longer end of the yield curve. The market's interpretation of Powell's speech was that the current pause is due to the tightening of financial conditions, specifically the rise in long-term interest rates. In Canada, markets have begun to price in cuts anticipated for 2024. Despite this pause, ongoing quantitative tightening (QT) means that monetary tightening continues. Powell indicated that bank reserves are plentiful, and that QT is only slightly impacting long-term rates, hinting at no change in the balance sheet reduction plan.

It's also important to consider that rates might fall if the economy decelerates, not merely due to reduced economic activity but also because of potentially lower tax revenues, which would worsen the budget deficit and increase Treasury supply. As we’ve been saying for months, there's no simple resolution to this complexity.

The United Auto Workers’ strikes had a significant impact on manufacturing, and the weak October print on the ISM Manufacturing Index might be a reflection of that. While September hovered near an inflection point of 49, we are now back down to a concerning 46.7, signaling a broad contraction.

In October, growth was reported in only two industries (the food/beverage/tobacco and plastics products sectors), compared to five in September. Companies reported a hiring slowdown and an uptick in staff reductions. This was a response to the ongoing management of decreasing inventory levels, due to uncertain future demand. Customers’ inventory levels are now described as 'just right', a status that is seen as neutral for future production. The eventual uptick in demand will determine when the manufacturing sector rebounds. We shall see if November corrects the course, now that the strikes are concluded.

Amid efforts by core OPEC+ members (particularly Russia and Saudi Arabia) to curtail oil production and drive up prices, the U.S. has countered with record-breaking oil output levels. According to the Energy Information Administration, U.S. crude oil production in August soared past pre-pandemic figures, reaching a historic high of 404.6 million barrels for the month. This output surpassed the previous record set in July by nearly 3 million barrels, despite a decrease in the number of operational U.S. oil rigs. This demonstrated that efficiency is what’s pushing U.S. production upwards. This push in supply from the U.S., combined with a weaker-than-expected economic outlook, helped bring down oil prices this week.

Listen to this week’s podcast for further insights.