Weekly Market Report: October 7, 2022
Last week delivered some frustrating back and forth price action with remarkable gains to start the week later washed out by renewed anxiety surrounding rising policy rate expectations. Numerous FOMC members reinforced the hawkish narrative which drove risk markets lower and interest rates higher. The week finished with minor gains across global equity markets (S&P 500 +1.5%) and another leg higher in interest rates, particularly across the shorter maturities. Commodities surged higher on the back of a 16% rally in crude oil prices and the USD moved higher still, up 0.9% on the week.
- A graphical look at year-to-date total returns for stock and bond markets makes your stomach turn while the USD makes your heart sing. The persistent rise in interest rates (nine consecutive weeks) is the clear driving force behind all three markets.
- A silver lining of the surge higher in interest rates is that Treasuries are offering yields higher than any time since 2007.
- The move higher in yields has yet to invert the 3m/10yr portion of the curve – perhaps signaling recession may be less likely than widely assumed.
- Eighteen Fed speaking engagements last week served to reinforce hawkish policy expectations with repeated emphasis on the Fed’s dual mandate of labor market and price stability coupled with subtle reminders the Fed mandate does not include managing the financial markets.
- You can add the World Bank and United Nations to a list including Paul Krugman, Elizabeth Warren, Greg Mankiw, and maybe most importantly Nick Timiraos suggesting that the Fed may be tightening too far amidst a global economic slowdown.
- The business of forecasting inflation seems uniform with both the Fed and Wall Street forecasting a pretty straight line fall back to approximately 2.5% by late 2024.
- Bianco Research makes the case that two of three deflationary forces (cheap labor, cheap goods, better technology) have given way and technology’s ability to offset is questionable.
- While nominal wages have been increasing at an alarming rate, real wages have fallen notably as evidenced by average hourly pay in August down 2.1% this year, adjusted for inflation.
- OPEC+ agreed to a 2mbpd production cut last week which is roughly 2% of global consumption and EIA data showed U.S. inventories dropping farther than expected.
- Whether the Credit Suisse situation is an isolated bankruptcy risk or potential systematic event remains to be seen but markets are clearly looking past their issues.
- The bullish contingent at BCA again highlighted three very clear pillars of support for the U.S. economy including labor market, robust consumer demand, and confidence in the Fed’s ability/resolve in beating inflation.
Economic Release Highlights
• The September jobs report registered 263,000, slightly more job creation than consensus call of 250,000 and the unemployment rate fell two ticks to 3.5%. The participation rate (62.3% vs 62.4%) and average hourly earnings (5.0% vs 5.1%) were both relatively in line with consensus.
• The August JOLT survey showed job openings falling much further than expected to 10.053mm, well below consensus calls for 11.150mm and further yet below July’s 11.239mm.
• September ISM Manufacturing Index reading of 50.9 fell short of the consensus estimate of 52.4. ISM Services beat expectations (56.7 vs 56.0) and improved one tick over the prior month.
• The JPM Global Manufacturing PMI declined slightly to 49.8 from August’s 50.3 reading. Global Services PMI came in at 50, just above expectations for 49.3.