Weekly Market Update
Despite the S&P 500 experiencing the 5th largest intraday reversal in history on Thursday (-2.4% to +2.6% intraday swing), stocks were unable to build off last week’s +2.6% gain and finished the week lower. Last Friday, we had highlighted three important inflation reports, the Producer Price Index (PPI), the Consumer Price Index (CPI), and Michigan Consumer Inflation expectations as investors anxiously look for any potential catalysts for a pause in interest rate hikes. Unfortunately, all three reports came in hotter than expected and expectations of a fourth consecutive 75-basis point (0.75%) interest rate hike on November 2nd ramped up as inflation is proving much stickier than expected. Particularly noteworthy was Thursday’s CPI report that showed inflation rose 8.2% year-over-year in September (see chart below) driven in large part by shelter and rent inflation which rose 6.6% and 7.2% year-over-year in September, the highest on record (per data from BLS). The Fed has already crushed housing market activity as the average rate on a 30-year fixed mortgage has surged to around 7% but rent and shelter inflation materially lag home sales activity and these components together make up about a third of the CPI. As a result, bulls had little to hang their hat on as the peak inflation narrative took yet another setback. There are some growing signs of spillover effects after the fastest rate hike cycle in over four decades, however, and Friday did include a rather surprising headline that the Treasury is asking primary dealers if it should intervene in the US Treasury market and buy back government bonds to improve liquidity. That headline coupled with growing liquidity issues in the United Kingdom and subtle acknowledgements from Fed member Lael Brainard and Secretary of the Treasury Janet Yellen of financial market strains might be something the Fed considers heading into its November 1-2 FOMC meeting, but bulls are justifiably reluctant to speculate on a Fed policy surprise. Q3 earnings did kick off in earnest Friday with JPMorgan, Wells Fargo, and Citigroup all performing fairly well, and with a rather quiet docket of economic data next week we expect the S&P 500 earnings season to command the lion’s share of investor attentions.
Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder