U.S. and International Equities
Markets Finish the Week Higher
Stocks finished the week higher amid Thursday’s cooler-than-expected Consumer Price Index (CPI) results. Moreover, Thursday’s rally was a testament to the bull’s peak inflation narrative as the Nasdaq Composite posted its third best daily performance since October 2008.
This week’s market results were led by information technology, materials, and communication services, along with real estate. Defensive sectors, healthcare, consumer staples, and utilities, along with this year’s best performing sector, energy, lagged the S&P 500 Index this week.
Emerging markets, which had a strong week, have been hampered by China’s lackluster economic backdrop and concerns that its top political leaders remain wedded to stringent zero-COVID policy measures, many of which are blamed for the nation’s sluggish economy. Friday did see an official announcement, after several early rumors, loosening some measures, which was met with a positive market response.
Fixed Income Mostly Higher- as Yields Fall
The Bloomberg Aggregate Bond Index finished the week higher as yields declined on expectations of a less aggressive Fed following the inflation report. Markets have embraced a downshift in Fed rate hikes, with a fifth consecutive 75 bps hike next month no longer expected. In addition, high-yield corporate bonds, as tracked by the Bloomberg High Yield index, gained ground for the week.
With investment grade corporate credit total return at -21% on the year, the theme of sharp outflows has persisted. Investment grade mutual funds have seen nearly $30 billion in redemptions since mid-September and are now down $112 billion on the year. Over shorter timeframes though, fund flows tend to lag rate moves/total returns. Therefore, we think the worst of the drag from outflows might be done for a while if interest rates consolidate around these levels.
Oil and natural gas prices finished the week lower. We expect natural gas prices to see increased volatility for the rest of 2022 and into 2023 over concerns about reduced supplies given the Eastern European crisis in addition to increased European and North American demand as we head into the winter months.
Gold, silver, and copper all finished solidly higher in a rough year for the metals. Global demand concerns contributed to a decline in copper prices this year; however the value of the industrial metal may have fallen too precipitously, as some analysts believe that worldwide supplies could remain tight for the longer term.
Economic Weekly Roundup
October Consumer Price Index Report
Both the core and headline Consumer Price Index rose less than forecasted, pushing the annual rates down considerably from the previous month. Shelter costs rose in October and contributed to over half of the rise in total inflation. Used car prices declined for the fourth consecutive month, adding downward pressure on goods prices. Medical care prices declined for the first time since the middle of last year as the services sector tries to find its balance.
China’s October Producer Price Index declined for the first time in two years, although less than economists expected. Nevertheless, this is another downbeat signal for the global economy as increasing inventories along with a cautious consumer in the West affected overseas demand for Chinese goods. Moreover, the decline reflects softer prices for the producers of raw materials following a decline in commodity prices.
Consumer price inflation in China also retreated sharply in October, underscoring weaker spending as consumers continue to deal with the government’s zero-tolerance approach to COVID-19 as well as a severe property crunch. Inflation in China has remained below the government’s preferred level of around 3%, which is lower than what most other countries have seen.
Weekly Employment Report
Continuing claims for unemployment insurance for the latest week came in below economists’ expectations, whereas initial claims came in above expectations breaking three straight weeks of lower readings. Labor market conditions remain tight even though there are some signs of slowing job growth, increasing layoffs, and higher unemployment.
The following economic data and potentially market-moving events are slated for the week ahead:
- Tuesday: Producer Price Index (Oct)
- Wednesday: Export Price Index (Oct), retail sales (Oct), business inventories (Sep), NAHB Housing Market Index (Nov)
- Thursday: Weekly initial and continuing unemployment claims, housing starts (Oct), building permits (Oct)
- Friday: Leading Indicators (Oct), existing home sales (Oct)
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