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Current Market Observations

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U.S. stocks ended the week essentially flat. The Dow Jones Industrial Average gained 0.12% on the week, the S&P 500 lost 0.16%, and the NASDAQ fell 0.39%. Last week, U.S. inflation grew to 3.67% from 3.18% the month prior. Additionally, mortgage rates climbed to an average of 7.18% from 7.12%, the highest rate since May 2001. It’s also worth noting that the Index of Consumer Sentiment, a survey of general economic outlook based on a random sample of U.S. households, has fallen to 67.70, a slight drop from the prior month but still significantly ahead from a year ago when it was 58.60 (the higher consumer sentiment, the better). These reports coincide with a slight sell-off in bonds, with the 10-year U.S. Treasury ending the week at 4.33%, seven basis points higher than last Friday. As always, please reach out to your advisor at Valley National Financial Advisors with any questions or concerns.

Global Economy

Though the Federal Reserve has raised rates by more than 500 basis points since January 2022, there has been a limited slowdown in US consumer demand. With the most recent inflation number gaining month-over-month, policymakers are beginning to look at rates from a new perspective: what do rate hikes mean for the supply side of the economy? The argument is that if rates rise too high, they could potentially undermine the benefits of increasing supply, as discussed in a paper presented at Jackson Hole last month. Despite this, we expect the Fed to remain data-driven in its battle to bring inflation down to the 2% target—it is unlikely that they will act solely on this argument moving forward when their action plan has proven relatively effective. Chart 1 below shows the components of inflation that are driven by either demand or supply. 

As of July, Mexico has overtaken China as the United States’s largest trade partner, representing 15% of U.S. imports (versus China’s 14.6%). Chart 2 below shows the trend in U.S. imports since 2017. As U.S.-China relations soured, the share of imports from Mexico and Canada increased significantly over the last six years, making nearshoring to Mexico a much more attractive option. Chart 3 is a map of major industrial parks that produce goods that eventually make their way into the United States—it’s no surprise that most of them are located near the border. As investment into these industrial parks increased, so did the U.S.’s dependence on Mexican goods. Since 2017, all categories of imports have increased except for food and electrical equipment, which decreased. Chart 4 shows each import category and their respective sizes. Chart 5 shows the change in investment in heavy machinery in Mexico since 1993—notice the sharp decline from when tariffs on Chinese goods began in 2018 through 2020 and then the sharp rise once the USMCA was enacted in place of NAFTA. 

What to Watch 

  • Monday, Sept. 18th  
    • 4:30PM – Retail Gas Price (Prior: $3.941/gal.) 
  • Tuesday, Sept. 19th  
    • 8:30AM – Housing Starts (Prior: 3.86%) 
    • 10:00AM – Job Openings: Total Nonfarm (Prior: 8.827M) 
  • Wednesday, Sept. 20th  
    • 2:30PM – Target Federal Funds Rate (Prior: 5.25-5.50) 
  • Thursday, Sept. 21st  
    • 8:30AM – Initial Claims for Unemployment (Prior: 220k) 
    • 10:00AM – Existing Home Sales (Prior: 4.07M) 
    • 12:00PM – 30 Year Mortgage Rate (Prior: 7.18%) 

Current Market Observations

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The equity market ended the week mixed as a rally in tech stocks propelled the NASDAQ and S&P 500 Index higher but failed to pull along the broader Dow Jones Industrial Average. For the week, the Dow Jones ended down 0.45%, the S&P 500 up 0.82%, and the NASDAQ higher by 2.26%. The focus remained heavy on the Federal Reserve to see what monetary policy would come out of their Jackson Hole conference, and spoiler alert, Chairman Powell implied that rates would remain elevated until inflation approaches the 2% target and maintains that level. Across the pond, the Eurozone is struggling to combat inflation, which is still above 5%, suggesting the ECB may have to be more aggressive in its policymaking. Finally, the effects of China’s post-pandemic slowdown are beginning to be felt by trade partners and are causing a net detraction in global growth. 

Global Economy 

Federal Reserve policymakers met last week in Jackson Hole for their annual conference, focusing on monetary policy. Fed Chair Jerome Powell said that the central bank is ready and willing to continue raising rates if inflation does not sustainably trend down towards its 2% target. U.S. inflation printed last month at 3.18%, while it peaked last August 2022 at 9.1%. Remember that the Federal Reserve raised rates consistently in 2022 and through most of 2023—just recently pausing its tightening cycle, which greatly aided in bringing inflation down to 3.18% from 9.1% during that time period. While we have seen some commentary suggesting that the Fed will begin cutting rates by the end of the year, the news from Jackson Hole suggests that we may be in for an extended period of higher rates through at least mid-2024. Chart 1 below shows U.S. quarter-over-quarter (QoQ) GDP plotted against personal consumption QoQ.   

Chart 1: 

While the U.S. received somewhat clear direction from the Fed last week, Europe faces relative silence from Christine Lagarde and the European Central Bank (ECB) leading up to the bank’s Sept. 14th meeting. Inflation has continued to run rampant in the Eurozone and is the core focus of the ECB’s data-dependent policymaking. For reference, EU core inflation (ex-Energy) remains above 5% versus the central bank’s 2% target (the same as the Fed’s target). See Chart 2 showing European inflation data. However, the recent release of Europe’s Purchasing Managers’ Index (PMI) signaled the contraction of private sector activity, meaning there is now more significant downward pressure on inflation. See Chart 3 for both components and composite of PMI charted against each other from 2002 through the present.  

Chart 2: 

Chart 3: 

This year, China’s economy was supposed to drive 1/3rd of global economic growth. For reference, for every 1% gain in China’s growth rate, global expansion is boosted by 0.3%. Unfortunately, the country’s post-pandemic reopening has been fraught with weak data seeping into its trade partners. So far this year, more than $10B has been pulled from China’s stock markets in the longest stretch of net outflows in the country’s history. This does not mean there are no benefits from an economic slowdown in China. For example, China’s slowdown will depress oil prices and lower prices for exported goods. This is good news for other places, such as the U.S. and Eurozone, which are still battling elevated inflation and will benefit from falling Chinese demand. Chinese imports have fallen as demand dropped from pandemic-era highs. See Charts 4 and 5 for Chinese import data. Chart 6 belowshows export prices falling with the Producer Price Index (PPI) and import prices.  

Chart 4: 

Chart 5: 

Chart 6: 

What to Watch 

  • Monday, Aug. 28th  
    • 4:30PM – Retail Gas Price (Prior: $3.984/gal.) 
  • Tuesday, Aug. 29th  
    • 9:00AM – Case-Shiller National Home Price Index (Prior: 302.38) 
    • 10:00AM – Total Nonfarm U.S. Job Openings (Prior: 9.582M) 
  • Wednesday, Aug. 30th  
    • 8:30AM – Real GDP QoQ (Prior: 2.40%) 
    • 10:00AM – Pending Home Sales QoQ/YoY (Priors: 0.26% / -15.60%) 
  • Thursday, August 31st  
    • 8:30AM – Personal Income/Spending MoM (Priors: 0.31% / 0.55%) 
    • 12:00PM – 30 Year Mortgage Rate (Prior: 7.23%) 
  • Friday, Sept. 1st  
    • 8:30AM – Labor Force Participation Rate (Prior: 62.60%) 
    • 8:30AM – Nonfarm Payrolls MoM (Prior: 187.00K) 
    • 8:30AM – Unemployment Rate (Prior: 3.50%) 
    • 11:00AM – U.S. Recession Probability (Prior: 66.01%) 

Federal Reserve policymakers signaled that they remain vigilant in their fight against inflation with the end goal continuing to be a 2.00% target rate. We believe Chairman Powell sees the impact of the aggressive tightening in 2022-23 and hinted that the impact of these hikes has yet to be fully felt across the economy. We think a continued pause in rate hikes at the September FOMC meeting is plausible but, of course, all actions are data dependent. U.S. economic growth remains resilient with a solid jobs market which is boosting consumer spending. The bond market continues to modestly sell off, especially in the short end of the curve, but this move is also offering investors a yield component on bonds that we have not seen in many years. Summer is nearing a close, back-to-school shopping is underway or already done and Wall Street will be getting back from the Hamptons and elsewhere. “Sell-in-May and Go-Away” means traders and portfolio managers will be hitting the floor looking to cement positive returns for year-end bonus season. Also, pay attention to the shifting climate in China as this will impact the global economy. Please reach out to your advisor at Valley National Financial Advisors with questions or concerns.

Current Market Observations

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The Dow Jones Industrial Average ended the week down 2.21%, the S&P500 index lost 2.11%, and the NASDAQ fell 2.59%. Global stocks declined due to concerns about China’s economic conditions and rising global rates. Investors also continue to grapple with inflation concerns. Additionally, the CBOE Volatility Index (VIX) reached its highest level since May 2023 last week, indicating increasing market anxiety. The Federal Reserve is meeting in Jackson Hole, WY, this week—we will be watching this symposium to gauge the Fed’s policy stance going forward. We still believe that the Fed will be able to gently land the economy and avoid a recession despite being seemingly bombarded with news to the contrary.   

Global Economy

According to a recent survey, the projected 3Q GDP growth has surged to 1.8%, a notable increase from the earlier estimate of 0.5% in July, as seen in Chart 1 below. The economy’s strength is driven by resilient consumer spending, supported by recent retail sales data and a strong job market. Economists’ revised projections depict an average U.S. economic growth of 2% this year and 0.9% in 2024, exceeding previous estimates and aligning with more positive global forecasts. Despite inflation concerns, economists foresee a prolonged period of higher interest rates without any imminent rate hikes, as seen in Chart 2 below. The possibility of a rate cut has been pushed to the second quarter of the following year, reflecting their confidence in a more resilient economy. 

Chart 1:  

Chart 2: 

Chinese banks have maintained the key five-year loan prime rate (LPR) at 4.2%, defying predictions for a 15-basis point cut, while ten basis points reduced the one-year LPR to 3.45% (see Charts 3, 4). This unexpected move reflects China’s dilemma in balancing the need to stimulate economic growth with the imperative to ensure the banking system’s stability. The decision is seen as an effort to protect banks’ net interest margins and profitability, which are crucial for financial stability. The Chinese government is grappling with the challenge of bolstering borrowing demand amidst deflationary pressures and waning confidence, all while trying to avoid instability in the financial sector.  

Chart 3: 

Chart 4:  

What to Watch 

  • Monday, August 21st  
  • Retail Gas Price at 4:30PM (Prior: $3.962/gal.) 
  • Tuesday, August 22nd  
  • Existing Home Sales/MoM at 11:00AM (Priors: 4.16M / -3.26%) 
  • Thursday, August 24th  
  • Initial Claims for Unemployment Insurance at 8:30AM (Prior: 239k) 
  • 30 Year Mortgage Rate at 12:00PM (Prior: 7.09%) 
  • Friday, August 25th  
  • Index of Consumer Sentiment at 10:00AM (Prior: 71.20) 

While the market has had negative returns in the past few weeks, we remain cautiously optimistic about the U.S. economy and the markets for 2023. Please reach out to your contact at Valley National Financial Advisors with any questions.

Current Market Observations

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Markets ended last week mostly flat, with the Dow Jones Industrial average netting a 0.62% gain, while the S&P500 and NASDAQ lost 0.31% and 1.90%, respectively. Year-to-date returns on all three major indexes remain well in positive territory (see details below). In terms of economic data released last week, the Producer Price Index (PPI) increased month-over-month and year-over-year, which means it is still contributing to inflation despite it slowing considerably. While the Fed is waiting for solid economic data before announcing they won the inflation war, American Consumer’s inflation expectations are declining. The current inflation expectation rate is just 3.3% overall over the next year versus the 3.4% figure that was anticipated in July. Interest rates continued to increase last week, with the 10-year U.S. Treasury increasing seven basis points to end the week at 4.16%.

Global Economy 

U.S. Producer Prices increased in July due to rises in service categories, underscoring the challenges in managing inflation. The Producer Price Index for final demand and the core index, excluding food and energy, rose by 0.3% in July, slightly surpassing predictions. Factors like stabilizing supply chains, limited overseas demand, and shifting consumer spending towards services have eased producer-level inflation. However, recent oil price hikes are reintroducing inflationary pressures. Inflation in healthcare services accelerated, impacting key inflation measures. Recent consumer price data indicating minimal gains might deter the Federal Reserve Bank from raising interest rates in September. The Core PPI, which excludes volatile components like food and energy, increased only 0.3% in July and 2.4% annually, which is getting close to the Fed’s target rate of 2.00%. See the detailed charts below from Bloomberg.

The U.S. housing market has rebounded, recovering nearly $3 trillion in lost value from the previous year’s slowdown. A continued shortage of listings has driven up prices and elevated the total worth of U.S. homes to a record $47 trillion, as reported by Redfin Corp, see Chart 2 below from Redfin. The reluctance of homeowners to relinquish their lower-rate mortgages amid rising borrowing costs has resulted in only 1% of U.S. homes changing ownership this year, the lowest figure in a decade. 

Policy and Politics 

During the upcoming BRICS (Brazil, Russia, India, China, & South Africa) economic summit in South Africa, discussions will revolve around increasing the utilization of local currencies for trade among member states, including establishing a common payments system and potentially forming a technical committee to explore the concept of a joint currency. The focus is not on replacing the U.S. dollar as the global currency but rather on enhancing the use of domestic currencies to foster trade and counterbalance the dominance of the U.S. This is important to us to watch as some BRICS countries are part of the major move in U.S. manufacturing around nearshoring (moving offshore manufacturing physically closer to U.S. headquarters) and friend-shoring (moving offshore manufacturing to trade partners deemed more “business friendly”) since the massive supply chain disruptions that were seen during the pandemic. 

What to Watch 

  • Monday, August 14th  
  • U.S. Retail Gas Price at 4:30PM (Prior: $3.94/gal.) 
  • Wednesday, August 16th  
  • U.S. Housing Starts / MoM at 8:30AM (Priors: 1.434M / -8.02%) 
  • U.S. Job Openings: Total Nonfarm at 10:00AM (Prior: 9.582M) 
  • Thursday, August 17th  
  • U.S. Initial Claims for Unemployment Insurance at 8:30AM (Prior: 248k) 
  • 30 Year Mortgage Rate at 12:00PM (Prior: 6.96%) 

As is typical in August, markets reach a calm/quiet period as Washington, DC, is on vacation with much of the rest of the country and world. Federal Chairman Jay Powell has slowly crafted his economic soft landing (battling inflation with higher interest rates and not sending the economy into a recession). However, the war is ongoing as inflation is still above the 2% target (U.S. Inflation Rate for July 2023 was 3.18%). As noted above, equity markets have slowly increased year-to-date, reflecting strong economic conditions, healthy labor and housing markets, and resilient consumers. Our mantra remains that investors can be cautiously optimistic for the remaining part of 2023.  

Current Market Observations

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Equity markets posted mixed results last week, with the Dow Jones Industrial Average notching a +2.08% return, the S&P 500 Index moving higher by +0.69%, and the NASDAQ Index trailing the broader markets with a –0.57% return for the week. The broadening in equity market returns beyond simply technology stocks has continued for several weeks. This move has been expected as better valuations existed outside of the “magnificent seven” tech stocks that have thus far carried most of the gains in 2023. Year-to-date returns remain indicative of their expected risk levels, with the Dow Jones Industrial Average at +7.54%, the S&P 500 Index at +19.24%, and the tech-heavy NASDAQ at +34.69%. Fixed income markets were largely unchanged on the week, with the 10-year US Treasury Bond moving higher by three basis points to close the week at 3.84%.

Global Economy 

The Federal Open Market Committee (FOMC) meets this week, and most analysts are expecting another +0.25% rate hike, which will put the Fed Funds rate at 5.50% from 0.00%-0.25% at the start of 2022. We expect the Fed will be winding down its recent aggressive rate hiking strategy, which was related to spiking inflation in the United States and elsewhere. See Chart 1 from Valley National Financial Advisors and Y Charts showing the Fed Funds Rate and the U.S. Inflation Rate. The recent U.S. Inflation reading was 2.97%, down from over 9.00% in July 2022, so the Fed’s strategy is clearly working, and their target inflation rate of 2.00% is finally within reach. Still, we expect the path to 2.00% will be lumpy, slower, and longer than the path from 9.00% to 3.00%. 

U.S. Economy & Market Outlook 

Washington is on break until after Labor Day, and that has historically been “good news” for the markets because lawmakers are away and, therefore, unable to impact markets with harmful policies or procedures negatively. After calling for a recession in 2023, as many economists and “market experts” did in 2022, that same group has now walked back their predictions and pushed off any recession or soft-landing until well into 2024. With that said the markets are now focusing on earnings. Thus far in 2023, corporate earnings have been healthy, but markets are forward-looking, and we expect new tailwinds for corporate earnings going forward. Tailwinds will include relief on expenses as inflation continues to abate, normal supply chain operation, and the end of further rate hikes by the Fed. For the past year, we have only had headwinds, and markets have held up well; tailwinds will bring new directions to the market, but again, expect volatility, as always.

What to Watch 

  • Monday, July 24th  
  • U.S. Retail Gas Price at 4:30PM (Prior: $3.676/gal.) 
  • Tuesday, July 25th  
  • Case-Shiller Home Price Index: National at 9:00AM (Prior: 299.72) 
  • Wednesday, July 26th  
  • U.S. Job Openings: Total Nonfarm at 10:00AM (Prior: 9.824M) 
  • Target Federal Funds Rate Upper Limit at 2:30PM (Prior: 5.25%) 
  • Thursday, July 27th  
  • U.S. Real GDP (Gross Domestic Product) QoQ at 8:30AM (Prior: 2.00%) 
  • 30 Year Mortgage Rate at 12:00PM (Prior: 6.78%) 
  • Friday, July 28th  
  • U.S. Core PCE (Personal Consumption Expenditure) Price Index MoM/YoY at 8:30AM (Priors: 0.30% / 4.62%) 
  • U.S. Personal Income MoM (Month Over Month) at 8:30AM (Prior: 0.40%) 
  • U.S. Personal Spending MoM at 8:30AM (Prior: 0.10%) 
  • U.S. Index of Consumer Sentiment at 10:00AM (Prior: 72.60) 

Equity markets continue to move higher, and the recent broadening of positive returns to cyclical stocks from only technology stocks adds to the breadth the market was lacking. Certainly, our antennas remain active any time the markets move higher with such muted volatility. The current VIX (Volatility Index) is 14.0, a near-record low. 2008/09 VIX measured 81.0 and 76.0 at the peak of the Pandemic. Many investors spent the first half of 2023 on the sidelines waiting for the recession that would never impact the market. Meanwhile, markets have steadily moved higher all year, and new tailwinds have emerged for corporate earnings in the form of lower expenses and a clearer path from the Fed on interest rate moves. Emergent consumer technologies like AI (Artificial Intelligence) might further impact expenses. Though the eventual impact of AI is unknown, one must pay attention to innovation and its potential global importance.

Current Market Observations

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Although last week’s jobs report showed a slowing in hiring during March 2023, equity markets posted another positive week across all three major market indexes, with the Dow Jones Industrial Average leading the way at +1.91% for the week ended April 7, 2023. Meanwhile, the S&P 500 Index notched a decent +1.34% for the week, while the NASDAQ returned +0.62%. Bond prices increased during the week but only modestly, with the 10-year U.S. Treasury bond falling four basis points to close the week at 3.39%. As recently as October 2022, the yield on the 10-year U.S. Treasury was 4.25%, marking a shocking move in rates due to still-unfounded recessionary fears and a clear flight to quality after the mini-banking crisis we saw in March as Silicon Valley Bank & Signature Bank failed.

Last Friday’s employment report from the Bureau of Labor Statistics showed the U.S. added 236,000 nonfarm payrolls in March, below the median economists’ forecast of 239,000 and down from February’s revised figure of +311,000, see Chart 1 below. Oddly, the unemployment rate moved a bit lower to 3.5% from 3.6%, and the labor force participation rate increased from 62.5% to 62.6%. At VNFA, these moves are modest and still point to a strong labor market by any historical measure. We continue to believe the U.S. labor market remains a strong point continuing to underpin the economy.

Investors understand the current objective of Fed Chairman Jay Powell is combatting inflation which peaked last summer at 9.06% and has since tapered to 6.04%, see Chart 2 below. Chair Powell has raised interest rates at a near-historic pace, and last year’s markets showed the result of that with poor returns across all sectors. As inflation comes under control and further rate hikes fade into the sunset, we expect markets to moderate but remain volatile. 

What to Watch

  • Monday, April 10th
    • U.S. Wholesale Inventories MoM at 10:00AM (Prior: -0.42%)
    • U.S. Retail Gas Price at 4:30PM (Prior: $3.606/gal.)
  • Wednesday, April 12th
    • U.S. Consumer Price Index MoM/YoY at 8:30AM (Prior: 0.37% / 6.04%)
    • U.S. Core Consumer Price Index MoM/YoY at 8:30AM (Prior: 0.45% / 5.53%)
  • Thursday, April 13th
    • U.S. Producer Price Index MoM/YoY at 8:30AM (Prior: -0.15% / 4.58%)
    • U.S. Core Producer Price Index MoM/YoY at 8:30AM (Prior: -0.00% / 4.40%)
    • 30 Year Mortgage Rate at 12:00PM (Prior: 6.28%)
  • Friday, April 14th
    • U.S. Export Prices MoM/YoY at 10:00AM (Prior: 0.20% / -0.85%)
    • U.S. Import Prices MoM/YoY at 10:00AM (Prior: -0.14% / -1.05%)
    • U.S. Index of Consumer Sentiment at 10:00AM (Prior: 62.00)

Equity markets finished the week slightly higher, while treasury yields fell slightly. Last week, the BLS (Bureau of Labor Statistics) labor report was right on target, missing median expectations by only a few thousand jobs and indicating a strong labor market as participation increased and the unemployment rate decreased. However, the strong jobs market is still running a bit contrary to the Fed’s rate-hike path. It was expected that the historic pace of rate increases would negatively affect workers and put many out of jobs, which has yet to be seen. Despite the continued strength in this area, inflation has trended downwards from a peak of 9.06% and is currently down to 6.04%, indicating that the Fed is putting up a good fight. We believe the path to 4% is ahead of us, while returning to the 2% average target may take years longer than initially expected.

Current Market Observations

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On Friday, a solid jobs report by the BLS (Bureau of Labor Statistics) pushed equity on bond markets higher as investors hung new hopes for an economic soft landing in 2023 rather than a Fed-induced recession. The economy added 223,000 jobs in December, beating consensus expectations and continuing the string of strong payroll gains. Further, job openings, a measure the Fed pays close attention to, stayed elevated. For the week ended January 6, 2023, the Dow Jones Industrial Average and the S&P 500 Index closed higher by +1.5%, while the NASDAQ moved higher by +1.0%. Lastly, the 10-year US Treasury fell a stunning 24 basis points to close the week at 3.55%.

Economy

As mentioned, the BLS reported a strong number of jobs, and job openings also remained elevated. The unemployment rate fell to 3.5%, presenting yet another piece of stubborn employment data. Chart 1 below from Valley National Financial Advisors and Y Charts shows job openings are elevated and elevated not just from the pandemic period of 2020 but also from the pre-pandemic period before 2020. Although many companies are announcing job cuts, especially in technology (Amazon) and banking (Goldman), these industries also hired many employees during and after the pandemic, giving them reasonable amounts of job cuts to make without impacting the overall employment picture. The combination of elevated job openings and low unemployment dims the prospects for a hard landing (aka recession) in 2023.

Policy and Politics

Republican Representative Kevin McCarthy was elected Speaker of the House in a near-record set of 15 elections before the conclusion on January 7, 2023. The election was less critical than the November 2022 election. At that point, the Republicans took control of the US House of Representatives and thereby set a firmly divided government in place for at least two years. Historically, markets like a divided government for the sole reason that nothing drastic can happen that would impact the business environment. It is too early to see which direction our divided government will take, but we take solace in the fact that there are strong checks and balances.

What to Watch

  • U.S. Inflation Rate for December 2022, released 1/12/23, (Prior 7.11%)
  • U.S. Core Consumer Price Index Year Over Year for December 2023, released 1/12/23, (Prior 5.96%)
  • U.S. Index of Consumer Sentiment for January 2023, released 1/13/23, (Prior 59.7)

Markets are off to a good start thus far in 2023. Still, a week does not make a year, and uncertainty remains with the Fed, China’s reopening, the Russia/Ukraine War, ongoing painful inflation, and the long-running inverted yield curve in the U.S. Treasury market has historically preceded a recession. In the face of this uncertainty, we have conflicting employment information that shows layoffs by many companies while job openings remain high and unemployment remains low. Inflation continues to be the Fed’s primary concern, and we expect further rate hikes in 2023. We also expect the pace, tenor, and size of those rate hikes to soften as Chairman Powell balances higher rates with inflation and prospects for a recession. Lastly, wage growth, while moderate recently, is keeping consumers healthy. When you add in bank balance sheet health and corporate earnings growing modestly, it is difficult to see a recession in 2023 and much easier to see the hoped-for “Soft Landing.”

Current Market Observations

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Mixed inflation data released last week put a new tenor of concern into the markets as investors worried that the latest data challenged the current consensus that the Federal Reserve Bank would be slowing its pace of interest rate increases. All major market indexes posted negative returns for the week, with the tech-heavy NASDAQ selling off -3.99% while the Dow Jones Industrial Average fell by only -2.77%. Additional U.S. inflation data is due this week, and a Fed policy decision will follow on Wednesday when the central bank is expected to raise interest rates by +0.50% percentage points.  

Global Economy 

As mentioned above, last week’s inflation data weighed heavily on the market, sending a mixed message to investors. Chart 1 below from Valley National Financial Advisors and Y Charts shows monthly U.S. PPI, U.S. Core PPI, and yearly U.S. PPI and U.S. Core PPI. Year-over-year data shows that inflation is falling, having peaked in July of 2022. However, monthly data – in this case from October to November 2022 – still showed a modest uptick. This mixed message puzzles investors because it does not give the Fed a true green light to halt further interest rate hikes. Additional information is due this week that will show U.S. Consumer Price Index and U.S. Core Consumer Price Index data, as well as the U.S. Inflation rate for November 2022.  

The U.S. Federal Reserve Bank wraps up this week’s meeting on Wednesday, and the bank is widely expected to raise interest rates an additional +0.50%, marking the seventh-rate hike for 2022. Fed Chairman Powell will hold a press conference after the meeting announcement, and investors will watch for any signs that point to the crucial “Fed Pivot” or change in the interest rate path. We believe there will be a reasonable period (six to 12 months) before the Fed changes its interest rate path from hiking to cutting rates. The U.S. Inflation rate is still running well above their “target” rate of +2.50% (~7.75% in October 2022), and there needs to be time for the rate hikes we saw in 2022 to percolate through the economy and thereby slow the inflation rate.

What to Watch 

Indeed, inflation is coming down, as we have seen in prices for crude oil and retail gasoline. But the Fed still has work to do – we know this, and it is common knowledge on the street. However, uncertainty about a pivot continues to weigh on the markets and investors. The consumer continues to show resilience, especially regarding spending. (Watch for retail sales data being released this week.) The labor market also remains healthy, with the unemployment rate below 4.00%. We are ending this week’s observations on a positive note. Last week, Bloomberg released a survey of Fund Managers’ predictions for 2023 (Chart 2) and showed an optimistic outlook for markets. We may see some softening in corporate profits or even a modest recession, but watch for 2023 to offer positive returns for stocks.  

Current Market Observations   

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Financial markets got a triple dose of good news immediately before the Veteran’s Day holiday weekend. On Thursday, the U.S. Inflation report for October 2022 showed a drop in the rate to 7.75% from 8.20% the prior month (See Chart 1). Further, a reasonable cessation in the Russia/Ukraine war seems imminent as Russia retreated from the Kherson region of Ukraine. Lastly, China announced a sweeping overhaul to its “zero-tolerance” practice regarding COVID-19 rules allowing the country to truly reopen its economy. Equity markets rallied (higher prices) sharply on the news, especially the NASDAQ (+8.10% on the week) which reacted favorably to lower interest rates (10-Year U.S. Treasury dropped 40 basis points to 3.82%) which help growth and technology companies as borrowing rates decrease. It would not be prudent of us to ignore another big story last week as Cryptocurrency trading giant FTX collapsed wiping out a $32 billion company overnight.  

US Economy 

Chart 1 below from Valley National Financial Advisors and Y Charts shows the U.S. monthly inflation rate. The sharp drop in the rate is the first tangible evidence that the Federal Reserve Bank’s tight monetary policy is finally curbing inflationary pressures. 

The move in the inflation data immediately impacted financial markets. The CME Group (Chicago Mercantile Exchange) Fed Watch Tool (Chart 2 below) now shows an 80% probability of “only” a +50 basis point rate hike at the December Federal Open Markets Committee meeting rather than a +75 basis point hike, which had been priced into the markets prior the lates inflation report. Chart 2shows the probabilities of changes to the Fed rate and U.S. monetary policy, as implied by 30-day Fed Funds futures trading data.This is a meaningful change in the futures markets as it shows that the end of the Fed’s current interest rate hiking cycle is nearing an end. The question remains around whether Chairman Powell can deliver the mythical “soft-landing” (slowing the economy to combat inflation but not slowing it so much that the economy falls into a recession). 

Policy and Politics 

The midterm election has concluded, and the results give us a weakly divided government with the Democrats maintaining control of the Senate and the Republicans gaining control of the House. As we have stated many times, financial markets appreciate a divided government because it ties the hands of any one party and prevents “unknown” events from impacting the markets. Overall, gridlock works – oddly, but truthfully. 

President Biden is meeting with Chinese leader Xi Jinping today, marking the first time the two leaders have met since Joe Biden took office. While more of a political show, the event does mark a time when relations between the U.S. and China are at a relative low point due to tensions between China and Taiwan. Any warming between the two countries will be viewed as a net positive for global markets. 

What to Watch 

As mentioned above, FTX, previously one of the world’s largest cryptocurrency exchange platforms, collapsed into bankruptcy wiping out a $32 billion company overnight. When we have discussed cryptocurrencies and we have always told investors to understand and research what you are buying. FTX is only one company in the swiftly growing world of cryptocurrencies but the old Wall Street adage “there’s never just one cockroach” rings true right now and we implore our readers to continue to exercise caution in this market. One thing for sure is that regulators and law makers will take a much greater interest in the crypto market.

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Last week we saw some great news around the Fed, Russia/Ukraine War and China. Softening inflation data gives the Fed some room to slow down its interest rate hiking cycle, which growth stocks (NASDAQ) view favorably. We are cautiously optimistic that we have seen the peak in inflation. Remain vigilant nonetheless and watch events unfold around the cryptocurrency markets, the Russia/Ukraine war and whether President Biden and Xi Jinping announce any actual results of their meeting.