Tuesday's Good News Was Hawkish News

Confidence jumped, durable-goods orders surged, homes sold. Each makes a December rate rise easier.

The Close

The Nasdaq Composite and the Russell 2000 both rose 1.2%, to 26,477.81 and 2,818.87 — an unusual pairing, since one tracks the biggest technology companies and the other the smallest domestic ones. The S&P 500 added 0.6% to 7,722.60. The Dow managed 15.99 points. Chipmakers led, and crude eased again.

Three economic releases landed before the opening bell, and all three came in strong. That is the part worth sitting with, because the Federal Reserve was meeting as they arrived, and strong is not the same thing as helpful.

One Big Thing

Consumer confidence rose to 91.7 in October from a revised 84.2, its first increase in four months and far above what forecasters expected. Orders for durable goods — machinery, aircraft, equipment meant to last years — climbed 1.8% in September against the 0.6% economists had pencilled in, the biggest rise in five months. New home sales also beat.

Read those three as an ordinary person and they are plainly good. Households feel better. Businesses are still buying equipment. Houses are still selling. Read them as a central banker worried about inflation and they say something less comfortable: with the policy rate already at 3.75% to 4%, demand has not cooled. The brake is on and the car is not slowing.

Every cheerful number on Tuesday was also an argument for higher interest rates. The market bought shares anyway.

This is the inversion that catches people out late in a tightening cycle. For most of the past two decades, good economic news meant cheaper money was coming or staying. When the central bank is instead trying to slow things down, the sign flips. Evidence of a healthy economy becomes evidence that the medicine has not worked yet.

Which makes Tuesday's rally a decision rather than a reflex. Buyers were betting that company earnings, arriving in volume this week, matter more than another quarter-point. They may be right. They were not reacting to the data.

The Chart That Explains It

The headline is an average of two very different moods. Americans rate conditions today at 120.4 and the next six months at 72.6 — a gap of nearly fifty points. Both rose this month. Only the first one tells the Fed whether people are still spending.

The Deeper Read

Further down the same release sits the number I would put in front of the committee. Asked what they expect prices to do over the next twelve months, Americans said 5.8%. That is lower than last month. It is also close to three times the Fed's 2% target, from a public that has now lived above that target for five years.

Expectations matter more than they sound. A household that believes prices will rise 5.8% asks for a bigger pay rise and buys the car now rather than next spring. A business that believes the same thing raises its own prices without much hesitation. Enough of both and the belief produces the outcome, which is the one kind of inflation a central bank genuinely fears, because it no longer needs a shortage to keep going.

The Conference Board's own economist was careful to note that October's jump does not break a longer downward trend in confidence, and attributed that trend to higher price levels eroding what people can buy. Cheerful month, unchanged underlying problem. The write-in comments were still dominated by the cost of food, groceries and fuel.

What This Means For You

For as long as the Fed is trying to slow the economy, add one question to every piece of economic news you read: does this make the central bank's job easier or harder? "Consumer confidence jumps" makes it harder. So does a strong jobs report, and so do rising wages. None of that means you should want the economy to struggle. It means the headline and the market reaction will often point in opposite directions, and you will save yourself a lot of confusion by expecting it.

For a retired or nearly retired investor, the practical consequence sits in the bond half of the portfolio. If rates go up again, existing bonds are worth a little less and newly bought ones pay a little more. Those two facts are not a crisis in either direction; they are the mechanism working.

The decision comes this afternoon. The language about December will matter more than the decision itself.

— Anthony

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