Weekly Economic Update – 11-07-2022

Economic Update 11-07-2022 

  • Economic data for the week included the Federal Reserve continuing its robust pace of interest rate increases—last week again by 0.75%. The ISM manufacturing and services surveys declined, but remained in expansionary territory. Labor reports continued to show positive growth, through nonfarm payrolls and job openings, while the pace of wage growth decelerated a bit.
  • Global equity markets were mixed, with declines in the U.S. but positive returns overseas—notably in emerging markets. Bonds fell back along with several central bank interest rate increases. Commodities rose along with higher energy prices, due to near-term concerns about inventories.

U.S. stocks started the week optimistically, and the FOMC meeting led to a quick uptick in stock prices, followed by a sharp drop of -2.5% as the press conference hawkishness disappointed financial markets. The employment situation report on Friday was closely watched for labor market tightness, with metrics remaining surprisingly strong. There were announcements of some hiring pauses, notably by Amazon, which also pulled down sentiment.

By sector, energy stocks led with gains over 2% along with higher oil prices, while materials and industrials also fared positively. All other sectors saw declines, led by nearly -7% losses in ‘growth’ groups technology, communications, and consumer discretionary. Real estate pulled back by nearly -2%. Per FactSet, 85% of S&P 500 firms have now reported earnings results for Q3, with over two-thirds having surprised in a positive way, with a combined actual/remaining estimated year-over-year growth of 2.2%. This has been led by energy, with earnings growth upwards of 140%, with seven other sectors having shown negative results, led by communications on the low end. So, while energy has boosted the overall index number, the economic slowdown has already made its way into earnings announcements. Estimates have come down steadily since mid-year, with those for Q4 now having fallen underwater, at -1.0%, although expectations aren’t calling for an extended negative stretch of multiple quarters. The forward 12-mo. P/E now stands at 16.1, which is right at about the long-term average.

Foreign developed market stocks fared oppositely from U.S. stocks, by ending the week with gains of 1-2%. The Bank of England similarly raised rates by 0.75% to 3.00%, given sharp inflation pressures, despite far more serious economic hurdles driven by high petroleum prices. This was eighth straight hike, and the largest one in over 30 years. However, BofE hikes have not generally been unanimous, as with the U.S. Fed. Additionally, their rhetoric has been far more pessimistic than that seen in Fed press conferences, no doubt justified due to recent high energy prices. Other central banks, such as Norway (0.25%), have been slowing down hikes, seeing the impact on their respective economies. This pulling back on hawkish sentiment was a positive for stock prices last week.

Emerging markets were up a more sizable 5+%, led by a double-digit recovery in China, although all other key nations also earned decently positive returns. Earlier last week, rumors of a ‘committee’ in China that was reviewing a possible exit to the zero-Covid  in Spring 2023 led stocks there to rebound sharply, although that rumor was never confirmed. However, it did demonstrate that policy as being one of the key risk factors holding back Chinese stocks from finally improving. A likelier outcome is a slower drift away from such policies in the spring, following successful testing of their mRNA vaccine. In Brazil, the victory of Lula over Bolsonaro follows a trend of left-leaning election wins in Central and South America as of late.

U.S. bonds fell back last week, as rates rose along with the Fed hiking decision. For the most part, longer-tend yields tracked the expectation for the Fed’s terminal rate to tick up from 4.5% to perhaps as high as 5.0%, although debate obviously remains about the path for 2023. The 2y-20y inversion has moved deeper, to the largest spread since 1982. It’s now accompanied by the 3m-10y for a week now—a combination which has been a more responsive recessionary signal historically (albeit with a wide range of 6 mo. to 18 mo. in the future). Investment-grade corporate outperformed treasuries slightly, while high yield fell back nearly -2% along with a stronger correlation to equities. Foreign developed market bonds were down as well, not helped by a slightly stronger dollar, while emerging market bonds saw gains.

Commodities gained ground by several percent for the week, with every sector in the positive. The price of crude oil rose by 5% to nearly $93/barrel, with concerns rising again about current inventory levels and ending of U.S. Strategic Petroleum Reserve releases. In addition, further sanctions on Russian oil are upcoming, further tightening global supplies. In a continuation from the prior weekend the Russian exit from an agreement to allow Ukraine grain exports caused a price spike early in the week; however, Ukrainian military actions appear to have forced a reversal in policy by mid-week.

Period ending 11/4/20221 Week (%)YTD (%)
S&P 500-3.31-19.83
Russell 2000-2.53-18.95
Bloomberg U.S. Aggregate-0.78-16.02
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. 

This entry was posted in Economic News. Bookmark the permalink.