Week in Review: October 7, 2022
October 11, 2022
Recap & Commentary
Markets ended the week higher thanks to a burst of optimism on Monday and Tuesday that the Federal Reserve might consider a “pivot.” Unfortunately, the rally quickly fizzled as many Fed members reinforced the need for the Fed to remain committed to its current course of action. Combined with the September jobs report, those comments pushed market expectations for another 0.75% Fed rate increase in November from 57% to 80%. Reflecting the increased expectations, yields rose with the 10-Year Treasury gaining 0.06% to end the week at 3.89%. The relatively small gain masked significant volatility in which the 10-Year fell to 3.62% on Tuesday as equity markets rallied.
Recent improvements in headline inflation have benefitted from falling energy prices, something the Fed said at its July meeting “could not be relied on as providing a basis for sustained lower inflation, as these prices could quickly rebound.” The comment seemed prescient after an announcement by OPEC+ that it plans to cut oil production by 2 million barrels/day (mbd). The news led to oil prices gaining 17% on the week. As seen in the most recent data, core inflation, excluding food and energy prices, rose 0.6% in August. A reacceleration of energy prices resulting in renewed upward pressure on headline inflation would leave the Fed with few choices but to continue raising rates.
Nonfarm payrolls added another 263K jobs in September, while unemployment fell 0.2% to 3.5%. While the pace of job growth was the slowest since April 2021, the markets nevertheless interpreted the report as “good news is bad” for future rate hikes. The slowing pace, however, suggests that the Fed’s actions are beginning to weigh on labor markets.
Unemployment fell 0.2% in September to 3.5%. The decline benefited from new job creation and a 0.1% decline in the labor force participation rate. Average hourly wage growth slipped 0.1% to 5.0% but remains well above pre-pandemic levels. Separate data showed job openings fell by just over one million in August to 10.05M. The sharp decline is further evidence that the Fed’s actions are beginning to filter through to labor markets, something the Fed has indicated will need to occur to bring inflation to heel.
Data provided by industry group ISM showed manufacturing activity slowed in September to its slowest pace since May 2020 and now stands just above the breakeven level between growth and contraction. Manufacturing employment contracted during the month, with some respondents indicating they have initiated hiring freezes. Prices decelerated to their slowest rate of growth since June 2020 and now stand nearly at breakeven. That may benefit future inflation readings.
Services activity continues to expand at the same pace seen in August. Additionally, service sector employment accelerated during the month. On the inflation front, prices decelerated to their slowest pace since January 2021, though on an absolute basis remain highly elevated.
The World Trade Organization revised its 2023 growth forecast for global trade from 3.4% to 1.0%. The reason: rising interest rates, falling energy supplies, and higher prices. Global trade is expected to grow 3.5% in 2022.
|U.S. Bond Market||-0.3%|
|10-Year Treas. Yield||3.89%|
|WTI Oil ($/bl)||$93|
The Week Ahead
- Consumer Inflation (CPI)
- Producer Inflation (PPI)
- Retail Sales
- Consumer Sentiment
- Weekly Jobless Claims