Week in Review: October 14, 2022

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.