Even though the tough economic climate, higher interest rates are necessary, I think a terminal rate close to 5% should suffice. There is no need to keep hiking rates when doing so only has diminishing returns. Instead, we should pause and evaluate the economy before making any more decisions about increasing rates. From what I can observe in the trends of the market, it seems like most people are thinking along these lines.
Five reasons to think twice about Central Banks’ raising rates
- The Federal Reserve is starting to express more caution about continuing to project higher interest rates. With four 75-basis point hikes already set (assuming another 75-basis point hike in November), and a likely additional 50/75 basis points in December, we think the Fed will focus on the idea of waiting to see how long it takes for rate hikes to affect the economy.
- The economists’ Consumer Price Index path as well as fixings point to improved optics on core and headline inflation in the next few months.
- Good economic news may start to slow down shortly: Recently, there have been a lot of positive surprises, and now those surprise indices are getting close to their peaks.
- It is unclear how the economy would respond to extremely tight monetary policy, even though some restrictive measures have already been put in place. It remains to be seen if these restrictions are enough to offset low-interest rates.
- European planners are expecting Bund yields to level off after they’ve increased noticeably in the past few months.
The Market
Although the risk is high for recession, geopolitical tension, and other macroeconomic instability, the earnings yield gap – a measure of how profitable stocks are relative to bonds – is close to the tightest it has been in 15 years. The S&P 500 index is more expensive than 75% of all other investments since 1980 when compared to real 10-year Treasury yields and investment-grade corporate bonds.
Most US stocks are expensive compared to historical prices, even though the S&P 500 has fallen 23% from its January peak. Starting the year at 21x NTM P/E, the S&P 500 was significantly above average in terms of valuation. The P/E multiple of 15.8x appears less stretched than other absolute metrics but still stands at the 66th percentile when compared to today’s market. In addition, many investors question the accuracy of EPS forecasts.
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
The Philly Fed manufacturing index, coming out this Thursday, is the key economic data release to keep an eye on this week. In addition, there are several speaking engagements from prominent Federal Reserve officials – governors Jefferson, Cook, and Bowman and presidents Bostic, Kashkari, Evans, Bullard, and Williams. – which will be important to listen to.
Global Spotlight
The Chinese Communist Party’s 20th quinquennial Party Congress will commence on Oct. 16. Within the approximately weeklong meeting, Xi Jinping is anticipated to be granted a third term as general secretary (China’s primary leader) and will name new members to supreme Party boards, signifying Beijing’s policy inclinations for the next five years. In addition, the Party will release a work report reflecting on past successes and highlighting major goals for the future. It is anticipated that they will amend their party constitution to consider Xi’s political thought at the same level as Mao Zedong. If this occurs, it would mean that Xi’s persona would become even more influential throughout China.
Zuma, former South African President, will appear in court again on October 17th for the continuation of his corruption trial. Zuma pleaded not guilty to charges which include accusations of an illegal $2 billion arms deal in the 1990s, as well as money laundering and racketeering. Zuma’s legal team has continuously attempted to postpone the trial and take the lead prosecutor off of the case, but those attempts will not stop the trial from proceeding. The Oct. 17th date for Zuma’s trials as well as future key trial dates will see increased risks for social unrest not only outside of courthouse areas but also in safe havens such as Johannesburg and Durban where Zuma is known to have a stronger presence. Though these protests don’t appear to have enough people to warrant a security intervention, they could be used as leverage by the Radical Economic Transformation faction of the ruling African National Congress. This group will try to weaken Ramaphosa’s power in the next few months.
The U.N. Security Council is set to have a meeting on October 18th regarding the continuation of the peacekeeping mission they have in Mali. This follows after hundreds of Malians showed up to protest MINUSMA, the acronym for UN’s Stabilization Mission in Mali, claiming that it was imperialist and went against sovereignty. After France left Mali six months ago, jihadist groups expanded their operations and now the U.N.’s ruling junta is demanding that they leave too. This has caused a lot of fear for the international community because if the U.N. does leave, security will get worse and the threat to neighboring West African countries will grow larger. it is doubtful that the United Nations will voluntarily remove its troops from Mali at this time, and the probability of violence against UN peacekeepers is likely to be a significant topic in future talks.
This week, both the United Kingdom and France will see fluctuations in politics and economics due to protests and disagreements between political parties. This internal strife makes it unclear what government policy will be moving forward. After announcing a series of fiscal policy U-turns on Oct. 14, Prime Minister Liz Truss will be fighting for her political life in the United Kingdom as she tries to calm down financial markets. Even though the Conservative Party’s rules don’t allow its members of parliament who are angry with Liz Truss to hold a no-confidence vote against her, many of those members will work really hard to damage her leadership and make her resign. The General Confederation of Labor in France will hold a nationwide strike on Oct. 18, and left-wing political parties may protest the government. If the French government does not reform the pension system, more protests could follow.
Stratfor.com
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
The Philly Fed manufacturing index, coming out this Thursday, is the key economic data release to keep an eye on this week. In addition, there are several speaking engagements from prominent Federal Reserve officials – governors Jefferson, Cook, and Bowman and presidents Bostic, Kashkari, Evans, Bullard, and Williams. – which will be important to listen to.
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 3.6%. Excluding the energy sector, the Y/Y earnings estimate is -3.1%.
- Of the 35 companies in the S&P 500 that have reported earnings to date for 22Q3, 68.6% 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. 17, 66 S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
