Will The Fed Pivot? (Weekly Market Cheat Sheet)

It was another bearish news-filled week as the Fed’s perspective of rising inflation has dominated Wall Street this week. Investors are intently monitoring economic statistics and earnings reports to understand what the Fed is thinking.

Following the September CPI report released on Thursday, which showed that prices grew 0.4 percent month over month while the job market remained solid, most economists believe the Fed will remain aggressive in its efforts to combat inflation (No Pivot).

This is significant because the Federal Reserve closely monitors inflation indicators such as the CPI and where consumers expect prices to go.

Truflation shows a decline but not a huge drop.

This suggests that additional rate hikes are inevitable in the coming months, putting extra negative pressure on equities.

In other economic news, retail sales were flat in September, most likely due to continuing price rises dampening demand, and this trend hurts the economy as a whole.

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The holiday season is almost here, and while major retailers have been releasing offers earlier and earlier, some “discount weariness” may be setting in. The “Santa Rally” will likely bring coal as consumers are cutting back.

Friday’s Bear run accelerated in response to the University of Michigan’s consumer inflation expectations poll, which showed rising inflation. Again, this should hurt Christmas sales.

In the United Kingdom, the match between the Bank of England and Liz Truss has typically favored the older of the two ladies. After the tax-cut announcement catastrophe, the Prime Minister fired her short-lived finance minister, Kwasi Kwarteng.

KEY EVENTS & CALENDAR

  • Wednesday, October 19 – Beige Book
  • Thursday, October 20 – Existing Home Sales (September)
  • Fed Talk

The first estimate of Chinese GDP growth in the third quarter will be released at the start of the week (Tuesday). This will be followed by the September UK consumer price index (Wednesday) and the US Philly Fed manufacturing index (Thursday).

On Wednesday, one of the Fed’s most renowned members, James Bullard, is slated to deliver a speech.

Next week, major corporations such as Johnson & Johnson, Roche, Netflix, Tesla, Nestlé, ASML, IBM, and L’Oréal will release their quarterly results.

MARKET MOVING NEWS

Potential Fed Pivot?

The key concern from last week that has carried over into this week is whether the Fed will pivot in response to a crisis and global financial contagion.

So far, there has been little suggestion of a halt, and any interest rate reduction has been flatly rejected.

Inflationary pressures will very certainly push the Fed to maintain its current path of additional tightening and rate hikes.

Here are a few key takeaways from the Fed’s September meeting notes:

First, the Fed reduced its forecast for US economic growth. According to the notes, “participants generally expected the US economy to grow at a below-trend rate in this and the next years.” As we have predicted, this is a textbook stagflation scenario (stagnant growth and rising inflation).

Second, a wage-price spiral is possible. “A number of participants stated that while a wage-price spiral had not yet emerged, its possible existence was identified as a risk.” The wage-price spiral happens when wages rise, which causes greater spending, which causes price inflation, which causes wages to grow to keep up with inflation.

It’s called a spiral because the two trends – greater earnings and higher prices – reinforce each other. Employers must raise wages to attract workers in a tight labor market. With inflation picking up from prior months, we have the makings of a wage-price spiral. The Fed will fix the wage problem by putting people out of work during a recession(Why we think the Jobs Report is almost as important as CPI).

Third, the Fed is debating the retail inventory issue. “A few participants said that business connections in some retail sectors, such as used vehicles and apparel, were preparing to reduce their inventories by cutting prices.” I’ve been mentioning the retail inventory problem on and off for the past six months, possibly longer, and winter deals are on their way.

The IMF issues a severe recession warning. ‘The worst is yet to come,’

“The worst is still to come, and for many individuals, 2023 will seem like a recession,” according to the analysis. “[t]he agency said Tuesday that it anticipates global growth to slow to 2.7 percent next year, with a 25% chance of falling below 2 percent.” This compared to 3.2 percent growth expected this year.” Despite all the talk of a recession, the IMF predicts growth. Slow progress, for sure. However, development.

The forecast slowdown causing global headlines today amounts to a 0.2 percentage point reduction in 2023 growth estimates and no change for this year compared to the July update. However, whether or not these forecasts are accurate is less significant than what the outlooks imply about sentiment.

Each time the IMF has given predictions this year, it appears that the reaction has been mainly pessimistic, with warnings that even these decreased growth forecasts may prove overly optimistic, as we see here. “If they go too hard, it might deepen a global downturn, while scaling back efforts could allow inflation to become entrenched, which the IMF dubbed the “greatest immediate threat to current and future prosperity.”

That suggests to us that the pessimism of disbelief rules today, which means that even if a deeper-than-expected poor patch or recession occurs, markets are unlikely to be shocked. And shocks, rather than generally anticipated occurrences, that move markets the most.

BONDS

Gilts, or British bonds, moved through all stages this week, shifting back and forth between assertions from one side and another. The resignation of Kwasi Kwarteng and the efforts of the Bank of England to calm the situation have definitely improved the tone. In a matter of days, the yield on British 10-year paper fell from 5% to less than 4%.

The recovery has spread to the continent, with the French OAT falling to 2.80 percent and the German Bund falling to 2.19 percent, both returning to last Friday’s levels. In the United States, the 10-year yield reached 3.93 percent, which has remained stable amid still-high inflation estimates. The market is almost certain that the Fed will raise rates again by 75 basis points in early November, but this has been the standard. Anything can become habitual.

COMMODITIES

OIL

This week saw a shift in the projection for the oil markets, which saw a 6% decline as a result of OPEC’s pessimistic view. In its most recent monthly report, the org revised its demand growth projections for 2022 and 2023 by 460,000 and 360,000 barrels per day.

According to OPEC, the effects of inflation and the global economic slowdown are to blame for the modification. While US WTI is trading at USD 87.50 per barrel, North Sea Brent is trading around USD 93.

GOLD & PRECIOUS METALS

Following the LME, which is contemplating placing limits on Russian metals, Washington is now preparing to go up against Moscow, Bloomberg reports, as the United States is thinking of prohibiting or raising duties on Russian aluminum.

The cost of aluminum has increased significantly to roughly USD 2360 per metric ton. Behind China, Russia is the world’s second-largest producer of aluminum. Gold’s downward trend in precious metals resumed at USD 1660, hurt by the acceleration of inflation in the US.

CRYPTOCURRENCY

The sector’s leader, bitcoin, has been lingering around $19,000 for the past month, putting a halt to its recent downward slide. For the time being, in an anxious macroeconomic environment, any technical rebound is relatively fragile, demonstrating that institutional, professional, and individual investors are still skeptical about cryptocurrency.

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