Week in Review: October 21, 2022

Markets ended another volatile week higher, with the S&P 500 enjoying its best week since late June. Since the start of October, the S&P 500 has either risen or fallen by 1% or more in nine out of 15 trading days. For the week, markets benefitted from policy changes in the UK, some upbeat earnings reports, and renewed hopes that the Federal Reserve might be nearing an inflection point with monetary policy. Rates, however, continued to move higher, with the 10-Year Treasury yield gaining 0.21% to end the week at 4.23%, its highest level since 2008.

In the UK, Prime Minister Liz Truss named a new Finance Minister who quickly reversed his predecessor’s measures which had roiled UK’s fixed income and currency markets. The moves helped push the dollar lower, benefitting US companies with significant overseas exposure. However, Truss had resigned by Friday, just six weeks after becoming Prime Minister, having lost the confidence of her party.

On Friday, a Wall Street Journal article suggested that the Fed is poised to raise rates by another 0.75% in November before debating “whether and how to signal plans to approve a smaller increase in December.” The article led to renewed investor hopes that the Fed is approaching a “pivot” with respect to policy. Assuming another 0.75% increase in November, the Fed will have raised rates by a cumulative 3.75% in six meetings. Intuitively, slowing rate hikes makes sense as it would allow the Fed to assess the effects of its actions thus far. However, with core inflation continuing to rise, it might also force the Fed to reaccelerate its efforts in early 2023.  Such an approach would seemingly be at odds with Fed Chair Jay Powell’s Jackson Hole speech in which he stated that “the historical record cautions strongly against prematurely loosening policy.”