Week in Review: October 21, 2022
October 24, 2022
Recap & Commentary
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.”
Housing data was mixed but did little to change the narrative that the sector remains pressured by higher mortgage rates. Compared to a year ago, housing starts fell 8%, following an unexpected 14% jump in August. Permits increased 1.4% from August but were down 3% from a year ago. Existing home sales fell to a 10-year low, excluding pandemic distortions in early 2020. Compared to a year ago, sales fell 24%. Pricing has not responded as quickly due to limited inventory. While the median price fell for the third consecutive month to $384.8K, on an annual basis, prices increased 8.4%.
Industrial production rose 0.4% for the month and 5.3% from a year earlier. At the same time, capacity utilization increased 0.2% to 80.3%. At current levels, neither indicator is reflecting an imminent slowdown in economic activity.
Weekly jobless claims fell 12K to 226K. After hitting a recent peak of 261K in July, initial claims have now remained below 230K for eight consecutive weeks, suggesting that employers have not taken any meaningful steps to reduce headcount despite growing talk of a looming recession.
Through Friday, 20% of S&P 500 companies had reported 3Q22 earnings. Thus far, 72% have beaten their earnings estimate. Net margins have been a primary focus given current inflation. According to industry group FactSet, the aggregate S&P 500 net margin is expected to be 12.0%, marking the fifth consecutive quarterly decline, but still above its 5-year average of 11.3%.
|U.S. Bond Market||-1.1%|
|10-Year Treas. Yield||4.23%|
|WTI Oil ($/bl)||$85|
The Week Ahead
- Manufacturing & Services PMI
- Consumer Confidence
- New Home Sales
- Pending Home Sales
- Durable Goods Orders
- Core PCE Inflation
- Weekly Jobless Claims