It was a “mixed signals” week for US stocks that ended the week with an assorted performance as investors struggled to make sense of conflicting messages on interest rates.
The Fed likes to ensure things are under control before reassuring the markets. Throughout the week, its members have been the epitome of pessimism, repeatedly repeating that a more accommodating approach is not on the horizon.
But investors are not buying it and appear to think the Fed is taking a hawkish standing.
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More and more signals don’t add up, such as how the labor market and consumer spending have continued to rise despite the slowing US economy. Despite the ongoing energy crisis, investor optimism remains high.
US stocks ended the week with a mixed performance as investors struggled to make sense of conflicting messages on interest rates.
Furthermore, strong employment figures and encouraging quarterly results from the retail sector imply the Federal Reserve’s rate hike campaign has not destabilized the economy.
This all indicates the Fed will continue to take a tough stance on inflation by implementing additional rate hikes in the near future. In the previous ten months, the stock market has suffered due to the hawkish attitude taken by the Fed.
Many investors believe that the Fed will pivot, especially if inflation has peaked.
So Has inflation peaked?
Wall Street seems to think so. Both Goldman Sachs and Morgan Stanley continue to tell clients that inflation is peaking and expect receding inflation next year.
If you are watching inflation based on Truflation, it has now taken a significant dip from a peak of 12% in March to 6.63. Unlike the CPI, these numbers are based on the actual cost of goods.
The analysts at Morgan Stanley anticipate that the Fed will halt rate hikes in January 2023 and then begin rate cuts in December of that same year. Goldman’s most recent inflation forecast is unequivocal: prepare for price declines.
There is a strong argument that the Fed will halt raising rates if inflation drops and unemployment rises. We are not likely to see the Fed officially pivot till after January. Given the possibility of a recession, I would not make any substantial purchases, especially in the retail sector.
After two weeks, we are finally getting the results, almost. The Republicans failed to take the Senate and underperformed overall. There is still a US Senate runoff race in Georgia which will give the Democrats another seat that will lead a majority. If the Republicans win, it will leave the Senate split.
The Republicans have won the House. It will likely be positive for the markets and economy as neither party will be able to do anything. Historically split, a split Congress and Presidency are good for the stock market.
The bad news is that the only thing that happens is more government spending, leading to record inflation. I do anticipate some major budget battles and expect the Democrats to try and pass bills during the lame-duck session.
KEY EVENTS & CALENDAR
- Wednesday, November 23 – Core Durable Goods Orders (MoM) (October)
- Wednesday, November 23 – New Home Sales (October)
On November 23, when the PMI indices for manufacturing and services are announced, investors will be able to gauge the health of the major economies. They will learn about US durable goods orders and the most recent Fed meeting minutes on the same day. On Thursday, November 24, when Americans celebrate Thanksgiving, European markets will watch Germany’s Ifo business environment index.
Regarding interest rates, the fact that the US yield curve is still inverted indicates that the market is expecting a recession, but this is nothing new. After a steep drop last week, the yield on 10-year government bonds has stabilized at roughly 3.78%.
If our reading is accurate, investors may anticipate a Fed policy shift, despite the central bank’s recent dovish comments.
In the energy commodity market, oil prices dropped this week. Oil prices spiked in response to rising geopolitical tensions in Ukraine. Still, the spikes were short-lived because the United States rapidly refuted the claim that Russian bombs had been dropped on Polish territory just across the border from Ukraine.
As a result, the gradual reopening of China, still penalized by its zero-Covid policy, had a more significant impact on oil prices than OPEC had anticipated. With the cartel’s gloomy forecast for the global economy, investor confidence has taken a hit.
WTI is currently selling for $79 per barrel, while Brent is fetching $86 per barrel. With the onset of cooler weather in Europe comes the necessity of turning on the heater. But since Europe’s storage facilities are nearly at capacity, this won’t be enough to exert any downward pressure on natural gas prices.
GOLD & PRECIOUS METALS
Base metal prices have been on an upward climb since the beginning of the month, but they’ve just slowed down. China’s recent actions to increase metals demand have captured the world’s attention. Nickel reached a midweek high of $30,000 after a leak in a tailings dam at one of the major deposits owned by Trafigura.
The current price of a ton of nickel on the LME is over $26,000, while the price of a ton of copper is around $8,150. The price of Gold has stalled at about $1760 (USD) in precious metals.
The bitcoin price has leveled off at the $16.5k mark this week after falling by -22% the week before. Withdrawals of liquidity on exchange platforms show that the FTX drop last week is still causing concern among economic agents with ties to the cryptocurrency sector.
In addition, the FTX collapse’s domino effect keeps growing, with significant signals of hysteria appearing among foreign actors. Bitcoin enthusiasts will need to hold tight until the cryptosphere becomes more transparent.