Monthly Markets Memo - November 2024

October Surprise

October is often associated with falling temperatures, leaves changing colors, and pumpkin spice somehow finding its way into just about every food or beverage for sale. The FOMC cut rates by 50bps to 4.75-5.00% on September 18th, and this was intended to signal that the committee was very much focused on reducing its restrictive monetary posture and that it was not “behind the curve” on reacting to weakness in the labor market. Welp, twelve days later the September employment report showed growth in payrolls way above expectations at 223k jobs and the unemployment rate fell a tenth of a point to 4.1%. This reduced the pressure and urgency on the Fed to cut and soon the market was pricing fewer cuts and further out into the future, and the immediate effect was rising yields across the curve, increasing by nearly 50bps (as much as the Fed had just cut the funds rate) in some tenors, like the 2Y Treasury. This likely came as a very unwelcome and disappointing surprise to many business owners and homebuyers who have been waiting for “the Fed to lower interest rates” so they can expand their businesses or buy homes at affordable rates. It’s like U.S. borrowers went trick-or-treating expecting full size candy bars, and instead got tricked with dental floss and toothbrushes. (apologies to the dentists in our audience).

Chart of the Month: Outrageous Demand

Continuing with last month’s spotlight on Utilities and Independent Power Producers, ERCOT updated its annual Long-Term Load Forecast this past summer and it’s striking how the estimates for peak demand have skyrocketed in just a single year as market participants begin to grasp the intensity of power demands from AI-focused datacenters and the massive impact of new industrial infrastructure (Hydrogen, Battery, EV, LNG, etc.) scheduled to come online across the state in the next few years. To put it in stark relief, the prior forecast showed peak demand growth estimated to grow at a plodding but respectable 1.4% annually from 2024 through 2028. Now the grid operator is expecting **12.4%** annual growth over the same period. The 2028 peak load estimate for 2028 was ramped higher from 89 GW to 137GW, that’s a nearly 50GW jump. For context, 55GW is the EIA estimate for all new installed generation capacity across the entire U.S. for 2024. This should serve as yet another reminder that while the long-term cash flows/returns/productivity gains from AI might be squishy and highly uncertain, there are billions of real dollars being invested in hard assets and infrastructure today that will have real economic impact across the state, the country, and the world.

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