Financial Markets Paring Back Rate Hike Expectations

    Consumer credit rose $25 billion in September, much lower than the $33 billion consensus estimate. Revolving credit, comprised mainly of credit card balances, rose 8.7% on the month, while nonrevolving credit, mainly student loans and auto loans, rose 5.7%. Consumer credit growth stepped down to a 6.8% annualized pace in the third quarter from 8.7% in the second quarter, and is likely to slow further as interest rates rise and a softer economy makes consumers turn more cautious.

    The NFIB’s Small Business Optimism Index dipped 0.8 points in October to 91.3 and was below its 98 long-run average for a 10th consecutive month. A third of small business owners still cite inflation as their single biggest problem. Half of respondents planned on passing on rising costs to their customers. Pessimism about sales and business conditions over the next six months increased, but roughly half of business owners still plan on hiring workers. A staggering 90% of owners who are hiring or planning to hire still report few or no qualified applicants for their vacancies.

    The Mortgage Bankers Association (MBA) Purchase Index fell 41% on the year in the week of November 4, and their Refinance Index plunged 87%. The 30-year fixed mortgage rate is hovering around 7%. 

    The Consumer Price Index (CPI) rose 0.4% in October, below the consensus forecast for a 0.6% increase. CPI in year-ago terms eased to 7.7% from 8.2% in September. Core CPI, excluding volatile energy and food prices, rose 0.3% and was also below the 0.5% consensus forecast. Falling used car and apparel prices contributed to slowing inflation, and food prices in grocery stores rose at a slower pace. Several sticky prices of services like veterinary services, auto repairs, private lessons, and daycare fees slowed after big jumps in the September release.

    Following October’s inflation surprise to the downside, financial markets have sharply pared back rate hike expectations. At present, markets expect the Fed to hike rates by 0.50 percentage points at the December 14 Open Market Committee decision. The fed funds rate is now expected to peak below 5%, matching Comerica’s November forecast, and down from expectations for a terminal rate north of 5% prior to the CPI report’s release.