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2020 Financial Markets Update

Week in Review: October 28, 2022

October 31, 2022

Recap & Commentary

Markets ended the week higher in anticipation that the Federal Reserve will announce (or at least telegraph) plans to be less aggressive with future rate hikes following its upcoming November meeting. A busy week for earnings reports and economic data also kept investors busy. Interest rates pulled back on Fed-related expectations, with the 10-Year Treasury falling 0.21% to end at 4.02%.

Emerging markets were the notable laggard, weighed down by Chinese stocks. President Xi Jinping secured an unprecedented third term and named many of his loyalists to key positions. There is concern that China will continue to pursue its Zero-Covid policies and possibly intensify its crackdown on various sectors, including the tech industry, despite the economic impact.

Economic activity (GDP) expanded 2.6% in 3Q, following a 0.6% decline in 2Q. Despite the relative strength of the headline number, underlying details pointed to further slowing. Consumer spending declined from 2.0% to 1.4% as spending on goods fell for a third consecutive quarter. Spending on services remained positive but slowed from 4.6% to 2.8%. Business spending fell for a second quarter, impacted by a 26% decline in housing, which shaved 1.4% off headline GDP growth. In a bit of an anomaly, trade was the most significant contributor to growth, adding 2.8%, its largest absolute contribution since at least 4Q18.

Through Friday, 52% of S&P 500 companies had reported earnings. Thus far, 71% have beaten their earnings estimate. According to industry group FactSet, 3Q22 aggregate S&P 500 earnings growth is expected to be 2.2%.

Economic Commentary

Economic data released during the week generally pointed to continued slowing economic activity, but that may have benefitted markets in terms of their expectations for the Fed’s upcoming meeting. With growth slowing, investors hope the Fed will take a more cautious approach to monetary policy.

Data from S&P Global showed that U.S. manufacturing and services activity slowed further in October, resulting in outright contraction for both sectors.

Consumers’ views on the economy dimmed slightly, led by a five-point decline in consumer confidence. Importantly, consumers’ inflation expectations remained relatively stable, with the one-year outlook dropping 0.1% to 5.0%, while the five-year outlook remained unchanged at 2.9%.

Housing activity continued to slump, with new and pending home sales falling 11% and 10%, respectively. Compared to a year ago, new and pending home sales fell 18% and 31%.

Headline durable goods orders rose 0.4% in September. However, a better measure of core business spending fell 0.7%, consistent with the broader decline in business spending seen in 3Q GDP data.

On the inflation front, the Fed’s preferred measure, core Personal Consumption Expenditures (PCE), rose 5.1% from a year ago, up from 4.9% recorded in August. The increase was consistent with the reacceleration seen in core Consumer Price Index (CPI) data released earlier in the month.

Of Note

The spread between the 3-month and 10-year Treasury yields briefly inverted during the week. Viewed by some as a more reliable recession indicator than the 2-10 spread, the inversion adds to the idea that a recession may be looming.

S&P 5004.0%
Small Caps6.0%
Intl. Developed4.1%
Intl. Emerging-2.3%
U.S. Bond Market1.7%
10-Year Treas. Yield4.02%
U.S. Dollar-1.2%
WTI Oil ($/bl)$88
Gold ($/oz)$1,648

The Week Ahead

  • Oct. Employment Report
  • ISM Manufacturing
  • ISM Services
  • JOLTs Job Openings
  • Weekly Jobless Claims

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