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National Non-Operating Observations
As expected, the Federal Reserve cut rates for the third time in 2019 at its October meeting. The target range for the Fed funds rate is now 1.50 percent to 1.75 percent. The Fed signaled its intention to hold rates steady at its next meeting, revising its language from “to act as appropriate to sustain the expansion” to “to assess the appropriate path for the target range.” Futures trading shows 30 percent odds of a December rate cut, and 20 percent odds of two rate cuts by next November.
October saw a third consecutive month of manufacturing contraction, despite overall economic growth marked by an initial Q3 Gross Domestic Product (GDP) growth estimate of 1.9 percent, which exceeded expectations. The Institute for Supply Management (ISM) Purchasing Managers Index (PMI) recovered 0.5 percent from a 10-year low in September to 48.3 percent, but is still below the contraction level of 50 percent. Notwithstanding the small month-over-month improvement, almost all manufacturing metrics remain in contraction territory.
Despite a 4.2 percent drop in the ISM Prices Index—driven by declines in raw materials prices—the Consumer Price Index (CPI) increased 0.4 percent, indicating rising inflation. This increase in CPI represents the largest jump since March 2019. However, the increase is accompanied by a decrease in the Conference Board’s Consumer Confidence Index, due to concerns about business conditions and job prospects.
After September’s 50-year-low unemployment rate, the pace of hiring slowed slightly, from 136,000 jobs added in September to 128,000 in October, as unemployment rose 0.1 percent. However, the overall job market continued its trend of strong performance, illustrated by a 0.2 percent increase in wages in October, and total wage growth of 3 percent over the last 12 months. In tandem, retail sales unexpectedly increased 0.3 percent, marking a 3.1 percent year-over-year increase. These movements suggest a strengthening consumer sector, which partially aided in offsetting some of the effect on GDP incurred by slowing manufacturing numbers.
†Q3 2019 U.S. Bureau of Economic Analysis “First Estimate”
*60/40 Asset Allocation assumes 30% S&P 500, 20% MSCI World, 10% MSCI EM, 40% Barclays Agg.
Notes: (1) reflective of most up-to-date data available; excludes food and energy sectors

October 2019
Month Over Month Change
Year Over Year Change

GDP Growth
Unemployment Rate
+10 bps
(20 bps)
Personal Consumption Expenditures, Y-o-Y(1)
(17 bps)
(23 bps)
(52 bps)
30yr MMD
+5 bps
(132 bps)
30yr Treasury
+7 bps
(121 bps)
60/40 Asset Allocation*
Non-Operating Assets
October was a strong month for investment assets. The blended 60/40 Asset Allocation increased 1.63 percent from September, continuing its recovery from August’s decline. Equities were up across the board, with the S&P 500 increasing 2.04 percent and MSCI World and Emerging Markets indices up 2.45 percent and 4.09 percent, respectively. The Barclays Aggregate Index increased 0.30 percent in October, following a 2.59 percent increase in August, its largest monthly increase since 2008. Stronger-than-expected corporate earnings, and hope of a trade deal between the U.S. and China continue to propel equities to record highs.
Long Term
Last Twelve Months
Non-Operating Liabilities
The 30-Year MMD and 30-year Treasury rates continued to increase from recent lows seen in August. The 30-year MMD ended the month at 2.06 percent, up 5 bps month-over-month. The 30-year Treasury yields rose 7 bps in October, ending the month at 2.18 percent. In the short-term markets, 1M LIBOR finished October at 1.78 percent, down 23 bps since the end of September and 52 bps since the beginning of 2019. The tax-exempt, short-term benchmark SIFMA ended the month at 1.12 percent, down 46 bps month-over-month and 49 bps on the year.
Municipal funds continue to see strong inflows amid increasing tax-exempt bond supply due to historically low rates. Positive sentiment from investors caused $7.9 billion to enter muni funds in October, with $76.2 billion entering the market since the start of 2019. There have been 43 consecutive weeks of muni fund inflows, with investors taking a “risk-off” approach due to volatility in the stock market, as evidenced by the $221.0 billion of domestic equity fund outflows since the start of the year.
Long Term
Last Twelve Months
Note: Taxable and tax-exempt debt capital markets, as approximated here by the “30-yr U.S. Treasury” and “30-yr MMD Index,” are dependent upon macroeconomic conditions, including inflation expectations, GDP growth, and investment opportunities elsewhere in the market. A key measure to track is bond fund flows, particularly in the more supply- and demand-sensitive tax-exempt market. Fund flows are monies moving into bond funds from new investment, and principal and interest payments on existing and maturing holdings. Strong fund flows generally signal that investors have more cash to put to work, a boon to the demand. Fund inflows generally are moderate and consistent over time, while fund outflows typically are large and sudden, as external events affect investor sentiment, resulting in quick position liquidation, which can drive yields up considerably in a short amount of time.
©2019 Kaufman, Hall & Associates, LLC
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