Weekly Economic Update – 11-16-2022

Economic Update 11-16-2022 

  • Economic data for the week included consumer price inflation coming in still higher relative to history and the Fed’s target, but at a slower pace than last month. The widely-anticipated mid-term elections resulted in a likely divided government, although vote counts were still ongoing by the end of the week. Consumer confidence again fell back, while jobless claims were little changed.
  • Global equity markets experienced a strong week, buoyed by the positive CPI inflation surprise, with foreign stocks especially benefitting from a drop in the value of the dollar. Bonds also fared well as long-term interest rates pulled back. Commodities were mixed, with crude oil lower and metals higher.

U.S. stocks continued a volatile fall week, with inputs driven by Tuesday’s mid-term election results (which took some time to tabulate and with results not as conclusive for a divided government as some had hoped) and Thursday’s consumer price index reading, which showed some improvement downward on a trailing 12-month basis. These are two items that financial markets have been waiting for clarity on and better news about, with uncertainty always being closely tied to volatility. That the latter would fuel a positive market response was not a huge surprise. Additionally, and perhaps even more importantly, a member of the Fed noted that 4.5% might be an appropriate place for a pause in rate hikes, which goes along with the lower inflation reading. With the current fed funds rate at 3.75-4.00%, that’s not far away. The sharp Thursday gain was the best single day in over two years.

By sector, growth stocks saw a strong rebound last week, led by technology and communications, up 9-10% each. Speculation was the winning approach last week, with technology firms with no profits outperforming higher quality companies. Defensive sectors health care and utilities came in last, but still rose over a percent for the week. Real estate rallied by over 7% along with interest rates falling back.

A peripheral source of volatility was the collapse of the FTX cryptocurrency exchange, despite being a darling company not long ago. It appears a potential mishandling of customer funds and company direct investments in crypto were to blame. Cryptocurrency volatility has the potential to bleed over into traditional asset classes, if not only for the fact of the volatility itself, with Bitcoin down nearly -80% from peak levels last year. Sadly, anecdotal reports note that pandemic stimulus payments were a source of some (or a lot) of the crypto speculation, although well-known institutions also provided FTX capital. This was real money that has now evaporated, and calls for crypto regulation have intensified.

Foreign stocks also experienced gains, to an even larger degree on net, due to a drop in the U.S. dollar, which directly raised foreign equity returns. Europe and Japan saw the strongest response, followed by emerging markets and the U.K. On a local currency level, stronger-than-expected earnings helped European markets, although U.K economic growth showed a Q3 decline of -0.2%, but was slightly better than expected. Emerging markets were led by Taiwan and South Korea, which outpaced China as Covid cases rose again, which offset  a -10% drop in Brazil due to higher inflation reading.

U.S. bonds experienced one of their stronger weeks in years, as long-term interest rates fell back sharply upon the tempered inflation news. Most bond categories fared similarly, from treasuries to high yield. Foreign bonds outshined domestic with the U.S. dollar weakening by -4% on the week, pushing developed and emerging market debt higher by equivalent amounts.

U.S. treasury bond issuance has fallen off dramatically in 2021 and 2022, which has kept overall supply low, resulting in potentially less impact from the Fed’s QT, and strong investor demand. This is particularly true from foreign buyers, where U.S. bonds provide high safety and higher yields than other sovereign alternatives. This investor demand has served to keep prices high and yields lower than they may otherwise would be. This can also exacerbate the inverted shape of the treasury yield curve, holding down 10y yields, while the Fed-driven 3m rate has continued to rise.

Commodities fell back on the week, as weakness in energy offset higher prices for industrial and precious metals—the latter likely helped by the weaker dollar. The price of crude oil fell by -4% to $89/barrel, along with a pullback in natural gas prices. Industrial metals have more recently benefitted from rumors of China moving away from zero-Covid policies eventually, in addition to low stockpiles. Gold has come back more recently, with the strong U.S. dollar flattening to moving downward a bit, as well as the crypto volatility.

Period ending 11/11/20221 Week (%)YTD (%)
S&P 5005.93-15.08
Russell 20004.64-15.19
Bloomberg U.S. Aggregate2.29-14.10
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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