Misguided Optimism | October 7, 2022 | FFS

The week was all about inflation data, but have we inflated its importance?

Monday S&P 500 0.04% | NASDAQ 0.03%

Markets were little changed on the day. There was very little economic news out before the bell on Monday. The week will likely be sharply focused on Wednesday when we get the updated figures for March inflation. The report is expected to show an increase from February.

Tuesday S&P 500 0.14% | NASDAQ 0.32%

Small business sentiment slipped in March to the lowest level since January 2013! Even still, markets advanced ahead of inflation data on Wednesday. Growth stocks out-performed which signals that an increase of inflation data would likely not hamper growth stock leadership. This is important because the rate cuts expected later this year would favor growth stocks most.

Wednesday S&P 500 0.95% | NASDAQ 0.84%

Consumer Price Index (CPI) information showed that inflation has stopped cooling. A 0.1% reading was replaced with a 0.4% reading. The main culprits were transportation services, energy, and home services. The markets moved sharply lower, but likely on the Federal Reserve Board (FRB) minutes release, rather than on CPI data. FRB Minutes showed concerns that inflation was stagnating, endangering the likelihood of the FRB cutting rates later this year.

Thursday S&P 500 0.74% | NASDAQ 1.68%

Producer Price Index (PPI), which is a proxy for wholesale inflation rose less than expected. Initial jobless claims fell on the day supporting a strong job market. The weaker than expected inflation data led to a bounce back rally by markets. Little was changed about rate cut expectations moving forward however, given the FRB minutes from March.

Friday S&P 500 1.46% | NASDAQ 1.62%

Michigan Consumer Sentiment is projected to slip, but remains in the high 70’s. Financial firms got earnings season underway on Friday and they did not impress. The slide on Friday solidified a down week for equities. The Nasdaq led markets lower on the day, but its Thursday rebound mitigated losses for the week.

Conclusion S&P 500 1.56% | NASDAQ 0.45%

The week ended well into the red. The fall represented the worst week for the S&P 500 since January. In January the focus was on the markets accepting that the FRB may only cut rates three times this year. This time it is on the realization that perhaps the FRB may not cut rates at all. As of now investor expectations are that the FRB will cut rates one, maybe two times (September and December). The meeting in two weeks should provide more clarity. Even with this change to rate cut expectations, it will be interesting to see what action the FRB takes with Quantitative Tightening. If they do start to slow the selling bonds that should provide some relief.

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Markets rose last week, and optimism was a bound early in the week. Was it misguided?

Monday S&P 500 2.59% | NASDAQ 2.27%

Markets opened the week in stark contrast to how they ended last week (and month). The sad part was that the move higher for equities came on signals that the US economy weakened. It was a move that signaled an expectation of a less hawkish Federal Reserve Bank (FRB). As of late, rallies of this type have been very short lived.

Tuesday S&P 500 3.06% | NASDAQ 3.34%

The rally continued for a second day. The strength of these increases is concerning as a reversal day would likely be just as deep. The moves to the north are happening under a false hope of a pivot from the FRB. This came as the Royal Bank of Australia delivered a smaller increase than expected. Additionally, after the UK removed a tax cut for the wealthy, interest rates began to retreat. This reaction was merely a reversal on the rate increases after the policy was announced a week ago. The FRB very plainly told markets on 8/26 not to expect a pivot until inflation has been beaten. With inflation siting above 8%, it seems unlikely to consider that beaten. This rally will likely be short lived.

Wednesday S&P 500 0.20% | NASDAQ 0.25%

The shine on the two-day rally came off a little on Wednesday. 10-year yields bounced back up and equities opened deep in the red. The good news is that throughout the day, equities managed to claw all the way back to even.

Thursday S&P 500 1.02% | NASDAQ 0.68%

Equities turned lower on Thursday as FRB governors are echoing the hawkish stance of the Bank. Additionally, initial jobless claims rose, however, it was a slight increase. 219K job losses is a pace that signals a strong job market. The number will likely increase to 300K or higher in a recession.

Friday S&P 500 2.80% | NASDAQ 3.80%

Happy Jobs Friday! Markets tumbled to close out the week. The jobs data was strong as the unemployment rate crept down to 3.5% on 263,000 non-farm payroll additions. The FRB is looking for the rate to increase and for job adds to slow closer to break even. Inflation will likely continue to be an issue awhile unemployment remains below 4% to 4.5%.

Conclusion S&P 500 3.01% | NASDAQ 0.73%

Equity markets rose for the week. Something that has been rare as of late. The rise, however, is seeming short lived as it was mainly from the first two trading days of the week. The rest of the days represented a claw back of those gains. The reason for gains was that if we get a recession, the FRB will pivot strategy to stabilize the economy. There has been zero indication from a very transparent FRB that this would be the case. There is historical precedent to say the market is right, however, all of those precedents came during low inflationary periods. At this point, rather than looking for a pivot, markets should accept a stabilization of rates is most likely. This would be the case until we see substantial damage to the employment market. At which time, the FRB would likely pivot as enough damage would have been done to inflation.