The jobs report from this past week showed that labor markets are still tight, which points to a strong CPI print for September. We’re expecting a 0.46%MoM increase in core CPI with some slight downside risk from used car prices. However, Core services prices—namely shelter—should continue to drive high core inflation rates. All of this together suggests that the Fed will maintain its plans to increase the policy rate by another 75bp in November.
Producer price data out on Wednesday should also show a strong increase of 0.5%MoM, excluding food and energy, and a softer 0.3%MoM, excluding food, energy and trade services. We continue to watch for further slowing in core goods prices in PPI that have been a good leading indicator for core goods in CPI.
Perhaps more important than PPI, University of Michigan preliminary inflation expectations for October will be released on Friday and we expect the 1y inflation
expectations to increase back to 4.8% from 4.7% in September. An uptick in the 5-10y inflation expectations would be more concerning for the Fed that wants to make
sure inflation expectations remain in reach.
Minutes from the September FOMC meeting will likely serve to underline the consistent Fed messaging that the priority is to address domestic inflation and a “pivot” should not be expected due to weaker growth or financial stability concerns. Our impression is that despite the slowdown in housing officials are concerned that monetary policy is not yet restrictive enough to slow inflation. Minutes may more explicitly signal that a 75bp hike is likely in November should the job Jobs Report remain solid (as it has) and inflation not slow down. We will be interested in any discussion of the balance sheet after Chair Powell seemed to definitively rule out near term mortgage sales in the press conference.
The Federal Reserve is continuing to raise interest rates, despite indicators that the economy may be slowing down. This is in an effort to combat inflation, which has been increasing recently. However, there are concerns that this could lead to a recession. There are also concerns about the high level of inflation, which is not yet back down to the Fed’s target rate of 2%.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Wednesday
- PPI and Core PPI
Thursday
- CPI and Core CPI
Friday
- Retail Sales
Global Spotlight
Palestinian officials met in Algeria. On October 10, Algeria will host representatives from Hamas, Fatah, and a dozen other Palestinian political groups for negotiations in Algiers. The meeting will be held in the Gaza Strip, where there is already a sea of troubles. Both sides have announced that they want to bring about “national reconciliation” and put an end to decades of political division. According to some media outlets and Palestinian sources, though, any potential for it to provide results between the warring political factions — especially between Hamas (which holds power in the Gaza Strip) and Fatah (which rules over the West Bank)— is doubtful. But the gathering underlines the enduring significance of the Palestinian issue to countries like Algeria, which has long supported the cause. It also fits in with Abdelmajid Tebboune’s efforts to improve Algerian regional status as a peacemaker, particularly between individuals and governments who don’t have close Western ties.
Lebanese lawmakers have once again attempted to select a new president. Lebanese parliament speaker Nabih Berri has set Oct. 13 as the next special session for Lebanese parliamentarians to choose the country’s next president before Michel Aoun’s six-year term expires at the end of the month. The last special parliament session failed to elect a successor, with many of the members providing blank ballots, most likely as a result of the sectarian bickering that frequently stymies legislation in Lebanon. However, before Aoun’s six-year term expires on Oct. 31, lawmakers are running out of time to choose a new president. If they cannot agree on a presidential candidate during the Oct. 13 session, it will raise the possibility that the presidential position will remain vacant at an important time for Lebanon, as it struggles with a severe economic problem and tries to negotiate a new loan agreement with the International Monetary Fund.
On October 13, Kazakhstan will host a regional security dialogue forum known as the Conference on Interaction and Confidence Building Measures in Asia (CICA). This summit is intended to boost Kazakh foreign policy and image as a global mediator. With the Astana summit rapidly approaching, many world leaders are scheduled to arrive in Kazakhstan for diplomatic talks. One leader eager for discussion is Turkish President Recep Tayyip Erdogan who wishes to meet face-to-face with Russian President Vladimir Putin. The two may have an opportunity to speak at length if their schedules align during the summit. Turkish President Recep Tayyip Erdogan will visit Kazakhstan’s capital, Nur-Sultan, on Oct. 12 for a meeting with Kazakh President Kassym-Jomart Tokayev ahead of the summit of the Conference on Interaction and Confidence Building Measures in Asia (CICA), which formally kicks off on Oct. 13. Leaders from the Commonwealth of Independent States (an alliance of ex-Soviet nations in Eastern Europe and Asia) are also scheduled to travel to Nur-Sultan next week for summits on Oct. 12 (foreign ministers) and Oct. 14 (heads of state). At these meetings, Russia is likely to focus on pressuring its regional partners to accept its annexations of Crimea and parts of southeastern Ukraine.
The last plenary session of China’s Communist Party’s 19th Central Committee. The 7th and final plenary meeting of the Communist Party of China’s 19th Central Committee will begin on October 9, which is expected to last 3-5 days. The 19th Central Committee will have its final meeting before the 20th Party Congress assembles on Oct. 16, during which members of the 20th Central Committee will be chosen for a new five-year term. At the seventh plenum, approximately 400 of China’s most important party officials will debate key questions for the 20th Party Congress, including constitutional revisions and long-term national policy goals. State media will publish a readout at the conclusion of the meeting that may give indications on the direction of China’s 20th Party Congress, including Xi Jinping’s continuing influence on China’s political and economic agenda.
Stratfor.com
Economic Calendar
Monthly headline CPI is expected to grow moderately by 0.2% due to the continuous decline in average retail gas prices (although they have stabilized recently). Additionally, food prices are predicted to soften after increasing by a mere 0.8% last month–the smallest increase since 2021.
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Review Last week’s numbers here.
Earnings
Aggregate Estimates and Revisions
- 22Q3 Y/Y earnings are expected to be 4.1%. Excluding the energy sector, the Y/Y earnings estimate is -2.6%.
- Of the 20 companies in the S&P 500 that have reported earnings to date for 22Q3, 65.0% have reported earnings above analyst estimates. This compares to a long-term average of 66.2% and prior four quarter average of 78.1%.
- During the week of Oct. 10, 14 S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
Macro Market
While the frenzied economic expansion of the 2021s has slowed, there is a clear disconnect between real-economy growth and equity markets. Don’t blame the markets weakness on the economy, blame rest soley on the Federal Open Market Committee.
Equities and interest rates moved almost in tandem during the pandemic’s concluding months. On the way out of the epidemic, equities and interest rates climbed at roughly the same rate. 2022 has been completely dierent; rising rates have been a no-nonsense negative for stocks, while declining rates have been a no-brainer positive. In fact, on a weekly basis, there is an inverse correlation between S&P500 and US 10Y treasury rates, which suggests that movements in borrowing costs can explain most of this year’s ups and downs in the stock market. With equities being so sensitive to interest rate hikes, it’s no surprise that investors are seizing on any indicators suggesting the Fed’s rate-hiking cycle might be coming to a close.
Valuations in the stock market have been low as part of the Federal Reserve’s plan to get inflation down. A lot of what has caused financial conditions to tighten up is that equity prices have gone down, and while this has achieved quite a bit, we’re not out of stimulative territory yet. In this regard, we do not believe that real rates are sufficiently negative to trigger a recession. Even if the equity market pain is very real, we don’t think that financial conditions and monetary policy are tight enough to stifle economic growth by so much that inflation will return to 2%. However, the rate of tightening increases the danger of an accident in the financial markets.
On inflation, there are worrying indicators that the commodity and goods price overheating pandemic is ending. But, just restoring goods prices to normal will not be enough to satisfy the Federal Reserve’s inflation objective. Service inflation is just as high, if not higher, and much more troublesome. Since the main input for service production is labor, it makes sense that there would be a strong connection between wages and prices for services. Because the labor market is so competitive, it would take an extraordinary decrease in hiring to affect wage growth, which is currently 5-6%. To reduce overall inflation back down to 2%, wage growth would have to fall all the way down to 3.5%. Such a reduction will only happen if unemployment rates begin to increase, and since there are still more than 10 million jobs available, that could take some time.
The Federal Reserve Board has made it clear that the only goal right now is to combat inflation. The prescription for this case is to raise rates into the narrow range and maintain them there for a while. Although the market currently believes that the central bank will cave and start cutting rates when the slowdown begins to affect us, we are not in agreement. The Fed was incorrect in previously assuming that high inflation would only be temporary, yet so far the market has been greatly mistaken about the Fed’s lack of action. We don’t think we’ve seen the high-water mark in rates yet, but weaker data will still initially produce lower market rates that will be reversed by Fed speak. Since the summer, we’ve lost track of how many FOCM member hawkish remarks there have been, with more on the way.
Over the following week, we will also receive a new labor market and inflation evaluation. Given that organizations continue to be concerned about their ability to find workers, we won’t be surprised if payroll growth is lower. We were caught off-guard by the inflation numbers last month, but we think that the more erratic components will go down this time. If payrolls and inflation end up being lower than projected, we believe that interest rates will drop and stocks will increase. Even though this may not signal the end of our economic troubles, it is still progress. The issue at hand is that there is too much strain on the economy as a whole and inflation is well above where it needs to be.
The Federal Reserve is continuing to raise interest rates, despite indicators that the economy may be slowing down. This is in an effort to combat inflation, which has been increasing recently. However, there are concerns that this could lead to a recession. There are also concerns about the high level of inflation, which is not yet back down to the Fed’s target rate of 2%.
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