LSA Connect

Economic Update 10-24-2022

• Economic data for the week included a rise in industrial production, mixed regional manufacturing indexes, and a variety of weaker housing sales and sentiment reports. The index of leading economic indicators continues to lean towards a recession in coming months.

• U.S. equity markets saw sharp gains last week, due to stronger earnings and rising hopes for a Fed potentially slowing down on rate hikes, with foreign stocks also positive. Bonds fell back due to still-rising long-term yields. Commodities were mixed.

• 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.

Economic Update 10-10-2022

• Economic data for the week included the ISM manufacturing index falling further than expected, while ISM services were little changed and remained expansionary. A variety of labor statistics came in generally positive, at least enough so for markets to believe the Federal Reserve will remain hawkish in upcoming policy meetings.

• Global stock markets gained ground last week, as economic data started slower than expected, raising the odds of a ‘hard landing’ and, therefore, more tempered central bank interest rate hikes. Bonds were mixed, with credit faring positively, while governments pulled back. Commodities gained sharply as last week’s OPEC+ meeting resulted in oil production cuts—boosting spot prices.

Dear,

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.

Economic Update 10-03-2022

• 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.

Economic Update 9-27-2022

• 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.

Economic Update 9-12-2022

• 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 Update 8-30-2022

• 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 Update 8-22-2022

• 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 Update 8-15-2022

• 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.