Friday, October 14, 2022
U.S. and International Equities
Markets Mostly Lower
Stocks finished mostly lower as Thursday’s release of the September Consumer Price Index report added to market volatility. On Thursday, the S&P 500 Index’s rally marked the fifth largest intraday reversal from a low in the history of the index while breaking a six-day losing streak. Investor sentiment, as measured by the spread between bulls and bears in the AAII data, is still in extreme territory as it is more than two standard deviations below its long-term average.
Fixed Income Lower Amid Fed Policy
The Bloomberg Aggregate Bond Index finished the week lower as yields increased as Thursday’s hotter-than-expected inflation report raised expectations that the Fed will maintain its hawkish stance for the rest of this year. High-yield corporate bonds, as tracked by the Bloomberg High Yield index, lost ground for the week, following their equity counterparts.
The move higher in Treasury yields this year has put upward pressure on most other business and consumer interest rates, as well residential mortgage rates. Agency mortgage-backed securities (MBS) are the second largest sector, (behind Treasury securities) so the impact of a slowing housing market impacts the MBS market as well.
After OPEC+ announced a 2 million barrel per day reduction in oil production last week in which oil gained over 10%, the commodity actually lost ground over the course of the week. The metals finished negative for the week as both gold and silver lost ground after finishing higher for the prior two straight weeks.
Economic Weekly Roundup
September’s Sticky CPI
September headline inflation eased slightly to 8.2% year-over year from 8.3% in August. However the inflation report was uneven across sectors. For example, used car prices declined for the third consecutive month, but rent and medical care prices continue to accelerate. Core inflation rose 6.6% from a year ago, the highest rate since 1982. The nagging pressure on core inflation will likely put pressure on the Federal Reserve (Fed) to stay aggressive. The biggest risk is inflation becoming entrenched in some sectors such as services as inflation cools in other sectors.
The Federal Reserve released minutes from the September meeting. The Fed will calibrate the pace of tightening according to global conditions. The Committee will take into account financial and international developments, and this reassurance from the Fed should provide some salve for investors nervous about the ripple effects from volatility in the currency markets and derivatives markets. The Minutes confirmed Fed officials are watching the job openings rate for clues about labor market tightness.
Weekly Employment Report
Continuing claims for unemployment insurance for the latest week came in below economists’ expectations whereas initial claims missed expectations. Labor market conditions remain tight even though there are some signs of slowing job growth, increasing layoffs, and higher unemployment.
The following economic data and potentially market-moving events are slated for the week ahead:
- Tuesday: Capacity utilization (Sep), industrial production (Sep), manufacturing production (Sep), National Association of Home Builders Housing Market Index (Oct)
- Wednesday: Building permits (Sep), housing starts (Sep), Federal Reserve Beige Book
- Thursday: Weekly initial and continuing unemployment claims, existing home sales (Sep), leading indicators (Sep)
Next week, 65 companies are expected to report Q3 earnings results
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