Weekly Economic Update – 10-17-2022

  • Economic data for the week included producer and consumer price inflation reports that continue to run hotter than expected—disappointing markets. Retail sales were little changed, although core sales saw slight nominal gains.
  • Global stock markets lost ground as concerns continued around high inflation and potential recession, especially abroad. Bonds also declined as interest rates rose again in keeping with higher CPI readings. Commodities fell back due to higher anticipated domestic crude oil supplies.

U.S. stocks fell back to start the week, as new restrictions by the Biden administration limit Chinese access to American semiconductor technology, on top of global demand weakness already in the space. As the week progressed, concerns over inflation reports and the start of Q3 earnings season continued to weigh on sentiment. By sector, defensive health care and consumer staples fared best, with positive returns of over 1%, while consumer discretionary and technology each lost over -3%. Utilities and real estate also fell back upon higher interest rates.

Markets experienced an especially odd day on Thursday, coinciding with the closely-watched CPI report. Inflation continued to ‘run hot’, especially on the core side, and didn’t show the improvement investors have been hoping for. However, some economists have referenced this phase as likely peaking or close to peak, as opposed to no end in sight. The monthly CPI data has become the market’s key metric recently, being the catalyst for Fed expectations, then interest rates, and flowing to economic health and earnings. Early stock futures gains (with hope for a decent report), sentiment turned sharply lower upon release of the report (down over -2%), yet reversed and ended the day gaining over 2.5%. This was described as one of the most volatile intra-day changes in decades. The reasons for the sudden turnaround remain vague, but some signs point to computer trading based on technical support indicators. For example, the round level of 3500 for the S&P, which also fell very close to the spot where 50% of the Mar. 2020-Jan. 2022 rally had retraced back to (considered by technicians to be an important place). Investor sentiment is especially low, pointing to high levels of overall bearishness, which, similar to what happens with extreme bullishness on the other side, can lead to a fatigue in negativity. The question remains: where is the stock market low? As usual, it’s highly unlikely for anyone to get the timing right, but repeated tests of bottoming around the -25% mark without further deterioration are a positive sign.

Foreign stocks fell back to a similar degree as domestic in developed markets, with increasing concerns over a near-term recession in Europe continuing to dominate sentiment. To some extent, this has raised hopes for a pullback in central bank hawkishness. Emerging market equities were down more sharply, as Chinese stocks in particular fell by over -7% on the week. While the Communist Party Congress meeting having started and resulted in few surprises, a noted continuation of their zero-Covid policy into next year negatively weighed on global sentiment, as this keeps the risk of future economic closures high and unpredictable.

U.S. bonds fell back last week as the 2-year treasury yield reached 4.5% (a 15-year high) and 10-year treasury note rose to 4.00%, before leveling off. As credit spreads widened, governments outperformed corporates generally, with floating rate bank loans faring best. Foreign bonds lagged domestic, hampered by continued strengthening in the U.S. dollar.

The Bank of England continued its bond-buying program last week in an effort to pull down long-term yields to more manageable levels. The lack of stability has aligned closely with the lack of policy consistency, which has troubled markets. Several nations in Europe have been caught between the sharp desires to provide fiscal relief to citizens, particularly due to high energy prices, but realizing markets are no longer providing a free pass for unlimited government spending. The sharp rise in rates was deemed to pose a serious risk to financial stability, notably the large ownership of bonds by pensions and other institutional entities. This situation in England may be the first in a series of ‘cracks’ that could give global central banks pause. Already, several banks have slowed the pace of hikes down to quarter-percent increments, which was below expectations. This may provide signs of a potential peak in rate hike regimes, as fears of economic slowing have traditionally caused banks to reverse course (despite their protests this cycle that they’ll be hawkish until inflation is tamed).

Commodities fell back across the board last week, led by energy and precious metals. The price of crude oil fell by -8% to just under $86/barrel. Last week, fears of a Biden fuel export ban, intended to bring down gasoline prices, resulted in higher domestic inventories. This was coupled with continued concerns over the extended zero-Covid policy in China, which has the potential of keeping demand fragile into 2023. Ironically, as we know, lower commodity prices have a dampening effect on inflation readings, so this becomes a double-edged sword.

Period ending 10/14/20221 Week (%)YTD (%)
S&P 500-1.53-23.87
Russell 2000-1.15-24.28
Bloomberg U.S. Aggregate-1.19-15.84
U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

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