Monitoring Global and Domestic Issues
Daylight savings time is in effect. The clocks were set back Nov. 5, signaling the changing of seasons and the approach of a new year. It has been a busy year, with a constant array of domestic and global issues to monitor.
Interest rates continue to be a significant focus in my professional world, and I imagine it’s a key consideration in your business plans too. Last Wednesday, the Federal Reserve’s rate-setting committee unanimously decided to maintain the key federal funds rate within a target range of 5.25% to 5.5%, a level that has held since July. Notably, this marked the second consecutive meeting in which the Federal Open Market Committee (FOMC) chose not to increase rates after a series of 11 rate hikes, including four in 2023. This may suggest that the FOMC’s strategy for a gradual economic adjustment is taking shape. Previously, there were expectations that rates might start to decrease at the end of 2023 or early 2024. However, these estimates have been revised, and it’s now widely anticipated that the Federal Reserve may begin to reduce the fed funds rate later in 2024, with further adjustments downward in 2025. Inflation remains a persistent factor, the economy shows resilience, but the job market is displaying signs of softening. An October employment report fell short of expectations, with only 150,000 jobs added and an unemployment rate increase to 3.9%, the highest since January 2022.
Another point of interest is corporate earnings. As of the week of Nov. 1, 81% of companies in the S&P 500 have reported Q3 2023 results. Of those, 82% exceeded estimated earnings per share (EPS), surpassing the five-year average of 77% and the 10-year average of 74%. If 82% remains the final figure for the quarter, it will be the highest percentage of S&P 500 companies reporting positive EPS surprises since Q3 2021 (also 82%). Overall, companies are reporting earnings 7.1% above estimates. The intriguing mix of factors includes inflation showing signs of correction but still above the Federal Reserve’s 2% target, a weakening job market, robust corporate earnings and ongoing conflicts both domestically and internationally.
Israel/Hamas conflict – consensus and energy prices
This ongoing conflict, with its historical roots and tragic loss of innocent lives, draws various opinions on next steps. Lines are being drawn regarding support and escalation. The involvement of geographically influential countries supporting both parties raises concerns about the conflict’s extent and alliances. Notably, energy suppliers, including Iran’s alignment with both Hamas and possibly Hezbollah, may lead to additional sanctions against Iran, disrupting the normal flow of oil and other energy products. Initially, oil markets saw a rise, followed by a retreat. As the conflict persists and potentially expands, it poses risks to shipments and sanctions. Furthermore, the overall stability of the Middle East, which has been relatively steady in recent times, could be challenged by an extended or escalated conflict.
The government shutdown
Just when it appeared that the U.S. government might face a shutdown on Oct. 1, 2023, Congress, to the surprise of many, averted it by passing a stopgap spending bill, known as a continuing resolution. The positive news is that this bill funds federal agencies at last year’s levels, but only for 45 days, through Nov. 17, 2023. Under the Antideficiency Act, federal agencies are prohibited from spending or obligating funds without Congress’s appropriation. When Congress fails to pass all 12 annual appropriation bills, federal agencies must halt non-essential functions until Congress acts, resulting in a government shutdown. The potential impact varies, but could affect activities like inspections, loan guarantees, nutrition assistance programs and access to national parks. Essential services like the postal service, air traffic control and the military continue to operate. Nevertheless, a shutdown is a disruption that affects services many Americans rely on. Moving forward, bipartisan support will be crucial to cooperative progress. Time will reveal how Representative Mike Johnson, the newly-elected Speaker of the House from Louisiana, guides the Republican party. The failure of three nominees to replace former House Speaker Kevin McCarthy suggests ongoing divisions within and between the parties.
China trading patterns
Tensions between China and the U.S. have been the subject of extensive coverage. These tensions stem from various factors, including intellectual property theft, China’s support for Russia following the invasion of Ukraine and recent threats by China regarding disputed areas in the South China Sea. Interestingly, for the first time in recent history, China is no longer the largest trading partner of the U.S.; that title now belongs to Mexico for the first four quarters of this year. Global alliances have shifted in recent years between China and its allies and Western nations. China has become more self-reliant, reducing its dependence on the west. For necessary items like commodities, China has expanded its partnerships with what were once considered competitors, obtaining energy resources from Russia and feed commodities from South America. These changes have significant implications, including the strength of alliances, new opportunities and partners for the U.S. and the impact on trade balances.
As of the end of 2021, here are five intriguing facts: China had a manufacturing workforce of 112 million people, produced 90% of the toys sold in the U.S., manufactured about 80% of the world’s umbrellas and led in global solar capacity while also being a major consumer of coal.
In closing, there are numerous areas to watch concerning you and your business. The economy, including consumers, has proven more resilient than expected. Looking ahead, we must consider when the effects of prolonged higher interest rates, increasing personal debt, concerns in commercial real estate and various other factors may trigger a slowdown impacting the broader economy.