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2020 Financial Markets Update

Week in Review: October 14, 2022

October 17, 2022

Recap & Commentary

Markets ended another volatile week lower as stronger-than-expected inflation further inflamed investor concerns about how aggressively the Federal Reserve will act to reestablish price stability. Reflecting those concerns, expectations for a 0.75% rate hike in November increased during the week from 81% to 97%, while expectations for another 0.75% hike in December jumped from 23% to 70%.

Yields responded to the increased expectations with the 10-Year Treasury ending the week at 4.02%, up from 3.89% a week ago, now at its highest level since 2008. Recent bond market volatility has resulted in the MOVE index, analogous to the VIX index used to measure equity market volatility, reaching levels last seen during the 2008-09 financial crisis.

The release of the Fed’s September meeting minutes showed that participants viewed inflation as “broad-based and unacceptably high” and that “the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action.” Further, “several participants underlined the need to maintain a restrictive stance for as long as necessary.” In short, the Fed is unlikely to deviate from its current course of action until it sees “compelling evidence” that inflation is moving back towards its 2% target.

Third quarter earnings season officially began, led by several large banks, including JP Morgan, Citi, and Wells Fargo. All three banks increased their loan loss reserves in preparation for slowing economic activity. Thus far, only 7% of S&P 500 companies have reported earnings, with 69% beating their consensus estimates. Current expectations are for aggregate S&P 500 earnings to increase 1.6%, the slowest pace since earnings contracted in 3Q20.

Economic Commentary

An uptick in consumer inflation (CPI) left investors with the unhappy prospect of the Fed being forced to maintain, or even increase, its efforts to subdue inflation. On a monthly basis, consumer prices accelerated 0.4% in September, twice the expected 0.2% rate, and up from just 0.1% in August. Core CPI rose 0.6%, unchanged from August’s pace. Compared to a year ago, headline CPI slowed from 8.3% to 8.2%, while core CPI accelerated from 6.3% to 6.6%. With prices moving in the wrong direction, there will be no Fed “pivot” for now.

Producer prices (PPI) experienced similar pressures, with the monthly rate jumping 0.4% following two months of modest contraction. Core PPI  was unchanged at 0.3%. Compared to a year ago, headline PPI slowed from 8.7% to 8.5%, while core PPI was unchanged at 7.2%.

Equally disappointing as the actual change in inflation was the increase in consumers’ one- and five-year inflation outlooks, which jumped 0.4% and 0.2%, to 5.1% and 2.9%, respectively. Throughout its fight to tame inflation, the Fed has kept a close eye on consumer expectations, afraid that they could become “unanchored,” leading to an upward “wage-price” spiral.

Of Note

The new UK Prime Minister dismissed her Finance Minister three weeks after he unveiled a new budget that sent shockwaves through the UK and global financial markets and threatened the survival of her nascent government.

S&P 500-1.6%
Small Caps-1.2%
Intl. Developed-1.4%
Intl. Emerging-3.8%
U.S. Bond Market-1.2%
10-Year Treas. Yield4.02%
U.S. Dollar0.4%
WTI Oil ($/bl)$86
Gold ($/oz)$1,650

The Week Ahead

  • Housing Starts
  • Existing Home Sales
  • Industrial Production
  • Weekly Jobless Claims

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