2023 Cuts No Longer Priced In, Companies Capitalize on Lower Equity Prices, and Update on Manufacturing

After recent economic data exceeded expectations, futures markets are no longer pricing in cuts to the Federal Funds rate in the first half of 2023. The markets are giving the Federal Reserve room to act aggressively to combat inflation. Despite recent rate hikes, financial conditions have actually become more accommodative as markets have stabilized. Companies are beginning to take advantage of lower equity prices. U.S. manufacturing is firing on all cylinders, but the outlook for future orders is deteriorating. Consumers are responding to falling gas prices. Homebuyer competition is finally returning to normal.

1. In recent speaking appearances, FOMC members have communicated that they expect the rate hike cycle to continue into 2023:

Source: The Daily Shot from 8/17/22

2. Lower credit default spreads indicate diminishing high yield default expectations:

Source: The Daily Shot from 8/12/22

3. Companies are continuing to buy back their shares, and show no signs of stopping:

Source: BNP Paribas  

4. M&A activity reached a low in July, but has rebounded quickly in August:

Source: Bloomberg Law   Read full article  

5. This is the highest capacity utilization for U.S. manufacturing since the late 90’s:

Source: The Daily Shot from 8/16/22

6. Capacity utilization is high and industrial production continues to grow, but manufactures are expecting orders to slow in the near future:

Source: Wells Fargo Securities  

7. Slowing order growth is only natural as many companies overshot on inventory as supply chains normalized:

Source: Gavekal Research  

8. Demand for gas is generally inelastic but consumers reacted as one would expect to the recent rise and fall in gas prices:

Source: U.S Energy Information Administration

9. Continued normalization of the housing market is welcome:

Source: Redfin