Well, gosh, here we are again. This last quarter started on a somewhat positive note with stocks rising until the middle of August. That cheer didn’t last however as uncertainties about rising interest rates and the direction of the economy pushed us back to a bit lower than where we started. Bonds followed a similar pattern as folks wrestled with the idea that interest rates would climb higher than had been anticipated earlier this year.
Predicting the future for the various markets is impossible but that doesn’t prevent the pundits from trying. We do know that this year has been full of surprises, and we wouldn’t be taken aback if there aren’t a few more before this period of volatility is done.
As always, folks’ consternation about the markets and their portfolio is in direct proportion to the timeline they are considering. If one’s focus is short term, and their measurement of success is based on several quarters of portfolio performance, these are dire times indeed. If, however, one takes a longer-term view, then the events of a particular quarter or year become less important and can be integrated with their overall financial plan.
Volatility roiled equity and fixed income markets this quarter as investors reacted to persistently high inflation and increasingly hawkish rhetoric from global central banks. In addition to delivering a third consecutive 75-basis point hike in September, the Fed reiterated its intention to push short-term rates into restrictive territory and “fight inflation at all costs,” even if that leads to a U.S. recession. With Fed Funds futures now pricing in a level above 4% by year-end 2022 through year-end 2023, the market seems to have accepted the prospect of a “raise-and-hold” approach to monetary policy. The LSA committee will be implementing model updates to the mutual fund and ETF’s, and VA models. With continued pressure on bonds and equities the committee will continue to focus on taking down risk in the short term. Below you will find a breakdown of the upcoming changes:
Economic data included no revisions in the still-negative Q2 U.S. GDP report. Durable goods fell back, as did home prices in several national indexes. Consumer confidence measures were mixed, while jobless claims improved.
Global equity markets fell back again, as investor moods were dampened by continued corporate negativity and higher interest rates, with financial concerns in the U.K. a key catalyst. Bonds declined as yields rose across much of the treasury curve. Commodities were mixed with crude oil prices ending slightly higher for the week.
The U.S. Federal Reserve raised rates again to the degree expected, in efforts to combat inflation. Economic results for the week included mixed housing data, with sharply higher starts coupled with weaker homebuilder sentiment. The index of leading economic indicators continued to fall, reaching an important recession warning signal.
Global equity markets fell back on the week, as rising central bank policy rates fueled fears the economy will ‘break’ and tip into recession. Bonds declined as well, with yields ticking up across the maturity curve to multi-year highs. Commodities fell back broadly upon the same recession fears and more direct concerns of lower demand.
The Federal Reserve Open Market Committee raised the fed funds rate today by another 0.75%, to a range of 3.00-3.25%. The vote was unanimous, with no dissents.
The formal statement language was hardly changed at all, only noting an upgrade from ‘softening’ to ‘modest growth’ in spending and production. The Fed has hiked by a total of 3.00% so far since they began in March, a pace twice as quick as the 12 months on average for that pace over the last 40 years. For perspective, the Fed has already hiked beyond what took three years to accomplish during the last 2015-18 cycle.
In the weeks prior to the meeting, the CME fed funds futures market1 signaled the rising likelihood (~85%) of the 0.75% move, with 1.00% being a less likely outcome. Similarly, rate hike expectations for Nov. and Dec. have also been risen, to 0.75% and 0.50%, respectively. The assumed fed funds terminal rate has drifted up to around 4.50% by mid-2023. However, new expectations for Dec. 2023 show a drop to 4.00-4.25%, which implies the Fed will have gone ‘too far’ sometime next year, requiring a reversal in policy (a reflection that monetary policy operates with a lag). The dot plots released today show a similar pattern, with a peak next year, but in a wide and symmetric range of 4.25-5.00%. Of course, these predictions all have to be taken with a grain of salt, but are a useful snapshot of current opinion.
On a holiday-shortened week, economic data for the week included the ISM services index strengthening, and mixed results for jobless claims.
Global equity markets gained last week, as central bank actions and member comments solidified a commitment to fighting inflation without overly damaging the global economy, in addition to inflation pressures themselves cooling. Bonds were mixed, with treasuries down due to higher rates, and high yield seeing gains. Commodities were mixed, with energy falling back due to natural gas prices, while crude oil was little changed.
Economic data for the week included a slight upward revision in Q2 GDP, good results from consumer sentiment and jobless claims, little change in durable goods orders, while housing data continued to show weakness.
Equity markets fell back in the U.S. and developed foreign markets, while emerging markets fared positively. Bonds pulled back due to higher interest rates across the yield curve. Commodities gained primarily due to higher prices for crude oil and grains.
Economic data for the week included strength in industrial production, little change in retail sales, and mixed results from several regional manufacturing surveys. Housing data also continued a string of weak monthly reports.
Stock markets fell back globally, with U.S. equities faring a bit better than Europe and Asia, and inflation remaining top of mind. Bonds fell back due to rising interest rates across the yield curve, with foreign bonds negatively affected by a continued strong U.S. dollar. Commodities fell back broadly, with the exception of natural gas, buoyed by hot weather and geopolitical constraints.
Economic data for the week included consumer price inflation coming in little changed on the headline side, while producer price inflation declined on a headline level. Consumer sentiment improved more than expected.
Global equity markets rose sharply last week, as slowed inflation results led to positive sentiment. Bonds fared positively, with little change in rates, but tighter credit spreads. Commodities gained across the board, helped by a weaker dollar.
After a lackluster start to the week, U.S. stocks were up sharply on Wed. onward after the monthly CPI report showed a flattening in headline prices, and core CPI not getting significantly worse. The search by markets for an inflation peak translates directly to the path the Fed may take in upcoming meetings, such as whether the Sept. FOMC rate hike will be 0.75%, 0.50% (consensus base case), or 0.25%. From a technical standpoint, markets have upwardly retraced almost 50% of the early 2022 decline, which has generated more bullish sentiment. For the chartists out there, a key question has been whether an upward ‘breakout’ continues to take hold from this point. Every sector gained ground last week, led by energy, materials, and financials, all gaining over 5%. Defensive sectors consumer staples and health care lagged with gains under 2%. Real estate rose over 4% on the week as well.
The Federal Reserve Open Market Committee raised the fed funds rate today by another 0.75%, to a new range of 2.25-2.50%. The vote was unanimous, with no dissents, unlike June’s meeting.
The formal statement language changed little, but noted ‘recent indicators of spending and production have softened’. However, job markets were still described as ‘robust’, and inflation remains ‘elevated’. The war in Ukraine was again acknowledged for the negative influence on inflation and global economic activity.
In the days prior, the CME fed funds futures market1 signaled the probability of a 0.75% hike at around 75%, and of a more extreme 1.00% hike at 25%—so it wasn’t quite a done deal. The chances of a larger hike had gained steam in recent weeks, with sky-high inflation data pressuring the Fed towards a more hawkish pace, as hinted at by some Fed members during their rounds of carefully-worded speeches. However, drops in consumer inflation expectations and petroleum prices eased that pressure a bit. For the rest of 2022, embedded assumptions still include a 0.50% hike in September, followed by 0.25% each in November and December. This results in a year-end futures market estimate of around 3.50%, in what appears to be the high (aka ‘terminal rate’) for this cycle. The furthest-out available estimate, July 2023, has actually fallen to around 3.25%—implying a rate pause or cut early next year, presumably in response to recession and policy reversal. As usual, the press conference and upcoming speech circuit will be used for setting the tone on how policy will be handled over the next few quarters, although they remain data dependent.
Economic data for the week included weakness in housing markets—seen in disappointing results for existing home sales, housing starts, and homebuilder sentiment. The index of leading indicators continued a string of monthly declines, and jobless claims rose.
Global equities experienced gains again last week, with foreign markets leading U.S. Bonds fared positively as well, as long-term interest rates tempered, and foreign debt was helped by a weaker dollar. Commodities were mixed with metals recovering, but grains prices falling with higher expected imports from war-torn Ukraine.
Economic data for the week included both producer and consumer inflation coming in higher than expectations, and continuing the string of multi-decade highs, which have weighed on business and consumer sentiment. Jobless claims also ticked up again, off of cyclical lows. Retail sales also came in stronger than expected, as did consumer sentiment (with lower long-term inflation expectations).
Global equity markets were down on net for the week, with mixed reactions to economic and inflation data. U.S. bonds gained ground as yields fell back and the treasury curve inverted; foreign bonds were held back by a strong U.S. dollar. Commodities fell back due to continued recession concerns.