Weekly Market Report: October 28, 2022

With October drawing to a close, we saw an exceptionally busy week with packed economic and 3Q earnings calendars, equity markets delivered another big week of gains with the S&P 500 +4% and developed international +3.25%. Emerging markets were down 2.75% with Chinese equities wrestling with some of the 20th Communist Party Congress narratives. Interest rates moved lower with the 10yr UST settling just above the 4% level on the back of monetary policy messaging and slowing economic trends. The USD softened last week while commodities moved higher with energy contracts posting strong gains on the week.

Market Anecdotes

• The sharp equity market rally over the past week plus is difficult to explain but economic slowdown in the U.S. and EU coupled with fresh narratives of the both central banks “stepping down” the scope of future rate hikes is behind the momentum – thanks Nick? 
• The S&P just made it back to its 50dma but still sits approximately 5% below its 200 dma which was a rather firm resistance level back in August rally back up near the 4,300 level. 
• The idea of the FOMC considering ‘stepping down’ future magnitudes of rate hikes didn’t impact November market expectations for 75bps but did reopen the door to a mere 50bps in December. The dual mandate of labor market and price stability warrant careful consideration. 
• The ECB delivered another 75bp rate hike on Thursday as expected and announced changes to the TLTRO facility while the BoJ left policy rates unchanged. 
• FactSet noted blended third quarter earnings for the S&P 500 sit at 2.5% growth with a blended net profit margin of 12% which would represent a fifth consecutive QoQ margin decline, still above the five-year average margin of 11.3%. 
• China’s 20th Communist Party Congress was consistent with expectations, reiterating “Common Prosperity” goals of income and wealth redistribution. Additionally, Chinese health officials further tightened Covid health restrictions. 
• NASDAQ Golden Dragon China index fell 14% in a single trading day last week driven by concerns of Xi power consolidation and potential impacts on domestic Chinese private enterprise.

Economic Release Highlights

• The September PIO report revealed YoY headline and core inflation of 6.2%a vs 6.1%e and 5.1% vs 5.2% alongside MoM readings of 0.3% vs 0.3% and 0.5% vs 0.5%, all in line with expectations.
• The September PIO report showed strong Personal Consumption Expenditures (0.6%a vs 0.4%e) and higher Personal Income growth of (0.4%a vs 0.3%e).
• 3Q Employment Cost Index came in right at the consensus forecast of 1.2% QoQ and 5.0% YoY.
• Third Quarter U.S. GDP accelerated to 2.6% from -0.6% the prior quarter and came in slightly higher than consensus forecast of 2.3% thanks to higher-than-expected Personal Consumption Expenditures of 1.4% versus forecast of 0.8%.
• October’s U.S. PMI report came in below consensus on both manufacturing (49.9 vs 51.2) and services (46.6 vs 49.3) fronts and saw the composite reading decline two points to 47.3.
• PMI reports for most non-U.S. developed markets (EU, Australia, U.K.) deteriorated in October with U.K. and Aussie services dipping into contraction territory. U.K. and Eurozone manufacturing deteriorated as well. However, Japan’s services reading improved to 53.0.
• September Durable Goods Orders missed estimates. New orders increased (0.4%a vs 0.6%e) while both ex/transportation (-0.5% vs 0.2%) and core capital goods (-0.7% vs 0.2%) contracted.
• The Case Shiller Home Price Index for August came in slightly under consensus forecast with prices MoM (-1.3% vs -0.8%) and YoY (13.1% vs 14.1%) softening more than expected.
• New Home Sales in September declined versus the prior month (603k vs 685k) but did not fall as much as was expected (585k). Pending Sales fell 10.2% versus estimates of -3.8%.
• October’s Consumer Confidence report registered 102.5 versus consensus forecast of 106.0.
• China’s Q3 GDP accelerated to 3.9% while overall September economic data remained mixed with deceleration in export growth (7.1% to 5.7%), retail sales (5.4% to 2.5%), and property investment (-8% YoY). Industrial production accelerated to (4.2% to 6.3%).

Weekly Market Report: October 21, 2022

A subtle, softer, gentler Fed narrative last week provided a helping of comfort food for equity markets leading to a strong 4.75% gain in the S&P 500 while international markets enjoyed gains of over 3% as well. Unfortunately, while equity markets giveth, bond markets taketh with three month and 20-year yields both rising close to 30bps on the week leaving the 10yr UST well above the 4% level. Commodity markets were relatively flat where oil held at $85 but natural gas fell 23%. The USD finally took a breather last week, falling 1.15%, but remains up nearly 20% over the past year.

Market Anecdotes

• Cheers to the weekend? Friday’s big gain heading into the weekend has been the exception this year given we haven’t seen as many -1%+ Fridays any year since 1952.
• The exceptional move higher in interest rates, now at a record 12th consecutive weekly increase, has resulted in extraordinary bond market losses but Bloomberg made special note of how (short term) oversold things may have become. Stock market is clearly not appreciating the move higher in yields.
• With 20% of S&P 500 companies reported, earnings growth sits at 1.5% with a beat rate of 72% and beat margin of 2.3%. Revenue growth sits at 8.5% with a beat rate of 70% and beat margin of 1.3%. Forward guidance has remained relatively sanguine.
• Goldman Sachs made note of emerging market forward P/E multiples at 10.5x sit somewhere between the 2018 and 2008 bear market levels. Meanwhile, many emerging market central banks are looking at rate cuts with much more manageable inflation levels. U.S. small caps P/E ratios also look very cheap relative to their
  large cap peers.
• While recessions clearly impact demand for goods and services, Arbor Data Science highlighted demand for oil declines as well – something FOMC policy makers are certainly aware of.
• Nearly ½ of Americans have looked for a second job to keep up with inflation in what is likely a significant midterm election cycle consideration.
• Japanese Yen weakness (vs USD) is every bit as historical as USD strength with the Yen/USD down nearly 50% so far this year. Persistent BoJ dovish policy has much to do with this trend.
• The pain that 20-year high mortgage rates have inflicted on the housing market is clear with prices, transaction volume, and home builder sentiment all falling significantly.

Economic Release Highlights

•  October’s Housing Market Index fell from 46 to 38, well below consensus forecast of 44.
• Housing Starts (1.439M) and Permits (1.564M) in September were relatively in line with expectations.
• Existing Home Sales in September of 4.71M came in slightly higher than the 4.695M consensus estimate.
• September’s Industrial Production (0.4% vs 0.1%) and Manufacturing Output (0.4% vs 0.2%) reports both exceeded consensus estimates.

Weekly Market Report: October 14, 2022

It was tough to read last week’s market action, particularly on Thursday’s massive intraday swing in both equity and bond markets. As has been the case, new data on inflation, jobs, and resulting monetary policy remain the primary factors in what has been a very macro driven market this year. The week finished with U.S. and developed international equity markets down approximately 1.5% but emerging markets falling nearly 4% driven by a tough week in Chinese markets. The USD and interest rates both moved higher with the 10yr UST yield closing at the 4% level for the first time since 2008. Commodity markets, particularly energy commodities, fell on global growth concerns leaving WTI crude oil at the $85bbl level.

Market Anecdotes

• Equity markets bounced pretty decisively off a low Thursday morning and maintained throughout the afternoon and while rates followed the same path, bonds did not fully recoup early losses and saw notable upward rate pressure, particularly on the short end of the curve.
• With equity markets down 25% and bond markets down 15% the right question to be asking might be where we are in respect to financial market capitulation than whether and when the economy will go through a recession.
• This week’s AAII sentiment survey, not surprisingly, ranks among the 60 lowest in the survey’s history (1987) and has seen less than 35 readings more bearish than last week’s 55.9%.
• With the midterms approaching, a brief reminder of election cycle theory serves up some constructive anecdotes as we approach the beginning of year three.
• A snapshot of strong U.S. corporate fundamentals is clear as we began 3Q earnings season last week with margin compression and slowing growth at the forefront of guidance.
• FOMC minutes released last week made clear the Fed’s consensus is that inflation risks outweigh over tightening risks.
• Inflation and jobs data are the primary market focus and while inflation did surprise on the upside last week, several inflation data points are beginning to trend lower – a very important anecdote when thinking about the future path of the economy and U.S. monetary policy.
• With the Atlanta Fed GDPNow model predicting +2.8% 3Q GDP for the U.S. economy, it feels like a relatively healthy economy & labor market for the FOMC to materially reconsider its policy path at this time.
• A look at the past few months of Fed quantitative tightening makes the downshift clear in terms of net Treasury supply purchases by the Fed.
• A UN resolution calling on countries not to recognize Russia’s annexation of Ukrainian territories saw 143 vote in favor, 5 opposed (Russian, North Korea, Belarus, Syria, Nicaragua), and 2 abstain (China, India).

Economic Release Highlights

• YoY headline (8.2%) and core (6.66%) CPI decreased and increased respectively from prior month readings and came in slightly higher than consensus.
• YoY headline (8.54%) and core (7.25%) PPI as well as MoM headline (0.38%) and core (0.30%) have begun to show signs of relief.
• September retail sales were flat (0.0%) while sales excluding gasoline and autos grew by 0.3%.
• UofM Consumer Sentiment reading for October of 59.8 represented a small improvement over prior month’s reading of 58.6.
• The NFIB Small Business Optimism Index rose 0.3 points over the prior month to 92.1.
• Weekly unemployment claims of 228,000 were slightly higher than expected and the 4-week moving average of 211,500 edged slightly higher.

Weekly Market Report: October 7, 2022

Last week delivered some frustrating back and forth price action with remarkable gains to start the week later washed out by renewed anxiety surrounding rising policy rate expectations. Numerous FOMC members reinforced the hawkish narrative which drove risk markets lower and interest rates higher. The week finished with minor gains across global equity markets (S&P 500 +1.5%) and another leg higher in interest rates, particularly across the shorter maturities. Commodities surged higher on the back of a 16% rally in crude oil prices and the USD moved higher still, up 0.9% on the week.

Market Anecdotes

• A graphical look at year-to-date total returns for stock and bond markets makes your stomach turn while the USD makes your heart sing. The persistent rise in interest rates (nine consecutive weeks) is the clear driving force behind all three markets. 
• A silver lining of the surge higher in interest rates is that Treasuries are offering yields higher than any time since 2007. 
• The move higher in yields has yet to invert the 3m/10yr portion of the curve – perhaps signaling recession may be less likely than widely assumed. 
• Eighteen Fed speaking engagements last week served to reinforce hawkish policy expectations with repeated emphasis on the Fed’s dual mandate of labor market and price stability coupled with subtle reminders the Fed mandate does not include managing the financial markets. 
• You can add the World Bank and United Nations to a list including Paul Krugman, Elizabeth Warren, Greg Mankiw, and maybe most importantly Nick Timiraos suggesting that the Fed may be tightening too far amidst a global economic slowdown. 
• The business of forecasting inflation seems uniform with both the Fed and Wall Street forecasting a pretty straight line fall back to approximately 2.5% by late 2024. 
• Bianco Research makes the case that two of three deflationary forces (cheap labor, cheap goods, better technology) have given way and technology’s ability to offset is questionable. 
• While nominal wages have been increasing at an alarming rate, real wages have fallen notably as evidenced by average hourly pay in August down 2.1% this year, adjusted for inflation. 
• OPEC+ agreed to a 2mbpd production cut last week which is roughly 2% of global consumption and EIA data showed U.S. inventories dropping farther than expected. 
• Whether the Credit Suisse situation is an isolated bankruptcy risk or potential systematic event remains to be seen but markets are clearly looking past their issues. 
• The bullish contingent at BCA again highlighted three very clear pillars of support for the U.S. economy including labor market, robust consumer demand, and confidence in the Fed’s ability/resolve in beating inflation.

Economic Release Highlights

• The September jobs report registered 263,000, slightly more job creation than consensus call of 250,000 and the unemployment rate fell two ticks to 3.5%. The participation rate (62.3% vs 62.4%) and average hourly earnings (5.0% vs 5.1%) were both relatively in line with consensus.
• The August JOLT survey showed job openings falling much further than expected to 10.053mm, well below consensus calls for 11.150mm and further yet below July’s 11.239mm.
• September ISM Manufacturing Index reading of 50.9 fell short of the consensus estimate of 52.4. ISM Services beat expectations (56.7 vs 56.0) and improved one tick over the prior month.
• The JPM Global Manufacturing PMI declined slightly to 49.8 from August’s 50.3 reading. Global Services PMI came in at 50, just above expectations for 49.3.

Weekly Market Report: September 30, 2022

Markets put a bow on a week, a month, and a quarter to forget last week including hitting a fresh 52-week low and chalking up the worst month in U.S. equities since 2008. The prior week’s flurry of central bank meetings expressing resolve in battling inflation has resulted in an exceptionally strong USD, surging bond yields, oil
dipping below $80, and an extension of the equity market selloff. U.S. and emerging markets fell approximately 3% while developed international markets were off 1.3%. The 10yr UST traded briefly above the 4% mark but settled back to 3.83% to close the week. Commodities were relatively unchanged on the week and the USD weakened slightly (0.95%) on the week.

Market Anecdotes

• Commensurate with the historic selloff in bonds, a look from Refinitiv and Bloomberg at volatility in interest rates illustrates how much of an outlier we are experiencing with record high MOVE Index readings coupled with record high bond market drawdowns.
• The USD has been on a tear since early 2021 thanks to real rate differentials, risk aversion, and global growth dynamics. Ultimately, dollar strength translates to tightening financial conditions and a domestic deflationary force with respect to global trade.
• Nineteen Fed speaking engagements last week did little to change the narrative coming out of the September FOMC meeting. Focus remained with persistence and resolve on the tightening cycle at hand.
• An upward revision in Q2 personal consumption and decline in initial jobless claims added to the hawkish narrative in what’s likely to be a “good news is bad news” narrative for some time.
• U.S. GDP slipped into negative territory for the first half of 2022 and borrowing costs have risen sharply yet payrolls have increased by an average of 438,000 between January and August and consumers have continued to spend.
• A hot reading in German inflation (10.9% YoY and 2.2% MoM) underscored the need and likely justification for another 75bps ECB hike on October 27th.
• The pandemic rally in overall commodity prices has fizzled with industrial metals, energy, and precious metals all declining but agricultural commodities have stabilized (+3.5% since beginning of August).
• A look by Fidelity at weekly and three-month flows (funds/ ETFs) into equity markets shows investors have yet to run for the exits with flows remaining relatively stable. AAII bearish sentiment readings are near record highs while bullish readings are 17.7% below average.
• Cash is king in a market where both bonds and stocks have been hammered. Bloomberg reports roughly $4.6t is sitting in US money markets, just shy of the 2020 record $4.8t.
• Negative years like 2022 are when hedge funds earn their keep, and this year is no different with CTA and global macro funds profiting nicely relative to long-only/long biased strategies.
• The BoE signaled it would intervene in the bond market to prop up the gilt following a surge in bond yields due to a sizable fiscal stimulus package announced last week. Additionally, the UK government reaffirmed its commitment to BoE independence amidst rumors to the contrary.

Economic Release Highlights

• The August PIO report revealed YoY headline and core inflation of 6.2% vs 6.1% and 4.9% vs 4.8% alongside MoM readings of 0.3% vs 0.2% and 0.6% vs 0.55, all exactly 0.1% higher than forecast.
• The August PIO report revealed higher than forecasted Personal Consumption Expenditures (0.4% vs 0.2%) and in line Personal Income growth of 0.3%. 
• Consumer Confidence in September improved over the prior month, higher than forecasted (108.0 vs 104.3).
• The third revision of Q2 GDP maintained the headline QoQ AR of -0.6% but did see a material upward revision in personal consumption expenditures from 1.5% to 2.0%.
• August Durable Goods Orders were marginally better than forecast with New Orders (-0.2% vs -0.4%), ExTransportation (0.2% vs 0.1%), and Core Capital Goods (1.3% vs 0.7%) exceeding consensus forecasts.
• China’s Caixin Manufacturing PMI Index dipped further into contractionary territory registering 48.1 versus
consensus estimate of 49.4. The CFLP PMI (C, M, S) registered 50.9, 50.1, 50.6.
• July Case-Shiller Home Price Index missed consensus on both MoM (-0.4% vs +0.3%) and YoY (16.1% vs 17.0%) measures.
• August New Home Sales of 685k came in much stronger than the 498k forecasted and increased over the prior month’s reading of 532k. Pending Home Sales fell 2% versus expectation of -0.8%.

Weekly Market Report: September 23, 2022

All eyes were on the FOMC decision and narrative last week with a relatively light economic calendar and sparse 2Q earnings announcements. Safe to say, the Fed delivered another dose of tough love, and it wasn’t very well received by risk markets as it was made clear the Fed is pretty comfortable with a policy induced recession. Thanks in large part to surging global interest rates, global equity markets traded down sharply with the S&P 500 touching a new bear market low, now -23.7% below the post Covid high. Developed international and emerging market equities traded sharply lower as well as U.S., German, and U.K. bond yields all marked new multi-year highs. Oil (-7.5%) dragged the commodity complex lower in sympathy with slowing global economic activity.

Market Anecdotes

• It was a difficult week with surging global bond yields and the ripple effect in what has been a historic bond market route and commensurate slide in equity markets where we’ve now endured three 10%+ downdrafts following the record high in early January.
• The surge in bond yields is historic no matter how you look at it. The 2y/10yr inversion exceeded 50bps last week – the deepest inversion we’ve seen since 1982 and a level commonly found in recessions (22% of the time) and always within 15 months of one.
• The FOMC delivered a third consecutive 75bps rate hike last week, taking rates to 3.0-3.25% and revised projections to another 125bps by year end with terminal rate expected to land at 4.5%-4.75%.
• In addition to median rate expectations detailed above, the SEP included downward revisions to forecasted economic growth and upward revisions to core inflation and unemployment.
• Synchronized tightening maintained its global theme last week with the U.S., BoE, Sweden, and Swiss central banks (among others) hiking rates while the BoJ again left rates unchanged. Accordingly, overall financial conditions have tightened meaningfully.
• USD strengthened 3.12% last week, wreaking havoc on FX markets including inducing Japan to engage in its first direct FX intervention since the 1990’s. The Euro is down 17% YTD and only three EM currencies (Mexico, Peru, Brazil) are up on the year with most down over 10%.
• The British Pound traded sharply lower on the announcement of a UK plan for the largest tax cuts since 1972, including the elimination of the top income tax bracket in a bid to stoke growth.
• Despite exceedingly tight global oil markets and ever-present geopolitical risk, oil has traded down in sympathy with concerns about falling global demand amid the economic slowdown.
• The Atlanta Fed GDPNow model which was firming in early August has deteriorated sharply in recent weeks with the latest Q3 U.S. GDP estimate at 0.3%.
• One consistently dovish monetary policy talk point is that while current inflation remains elevated, households seem to expect the Fed to succeed in bringing down inflation based on NY Fed, UofM and other household survey data.

Economic Release Highlights

• September U.S. PMI (C,M,S) of 49.3, 51.8, 49.2 measures improved meaningfully relative to August and beat consensus (47.0, 51.3, 45.0) across the board.
• September composite, services, and manufacturing PMI prints for September in the EU and UK were all in contractionary territory.
• The Conference Board LEI for August declined 0.3%, more than expectations for -0.1%, posting a sixth consecutive MoM decline.
• August Housing Starts (1.575M vs 1.440M) and Permits (1.517M vs 1.621M) came in above and below respectively, their consensus estimates. Existing Home Sales of 4.8M came in higher than forecasted (4.7M) but in a slowing trend with both MoM (-0.4%) and YoY (-19.9%) cooling off.
• September’s Housing Market Index registered a depressed 46 versus a consensus estimate of 48