WEEKLY: Fed “talking heads” pour cold water on rally
Week ended November 18, 2022
The week started off on a positive note with the bullish tone that ended the week before carrying through to the first half of this week. The euphoria as far as US equities was further fuelled by a weaker-than-anticipated PPI read for October, which was released on Tuesday morning before the market opened. However, as quickly as you can say “Fed pivot”, the talking heads from the Fed showed up towards the end of the week to say “not so fast” as they poured cold water on what had been a nice run in stocks since mid-October. Presidents-of-regional-Feds Mary Daly (San Francisco), Esther George (Kansas City) and James Bullard (St Louis) all reminded investors that the Fed is nowhere near the end of its fight against inflation, and this eventually took its toll as US equities peaked on Tuesday and struggled the rest of the week (albeit ending on a positive tone on Friday). The US Treasury market also got the message, with yields heading higher at the shorter end of the curve and lower at the longer end. The 2y-10y yield difference reached its most negative level in over 40 years.
In the UK, chancellor Jeremy Hunt released his Autumn Budget, with many of the provisions telegraphed well before the official release. If the UK isn’t in a world of trouble with the Bank of England battening down the hatch to address inflation (which reached 11.1% in October!), the government will undertake a series of “financially responsible measures” (my words) to address the deficit, including reductions in government expenditures and higher taxes. The markets saw this all coming and really didn’t react further, although it is clear now that the stewardship of PM Sunak and Chancellor Hunt have brought stability to the UK Gilt and Sterling markets, at least for the time being.
Other things that drove investor sentiment this week included:
The Democrats held the Senate (goodbye Nancy), the Republicans took the House, and former President Trump announced that he would run for President again in 2024. With Congressional control split, don’t expect much in the way of new ground breaking legislation in the coming two years. As far as 2024, my two cents is that the US needs some new Presidential blood, meaning a younger leader that better represents the next generation of Americans. Let’s see what unfolds in the coming months as candidates start to emerge from both parties.
Additional information on FTX seeped into the market as a third-party administrator got involved in trying to figure out what might be left as far as assets for investors and customers. Incoming CEO John J. Ray III, an experienced hand at sorting out bankruptcies involving corporate fraud (including Enron), found an unprecedented lack of controls and governance at the bankrupt company. The collateral damage into the broader cryptocurrency market is yet to be fully understood, which is the nature of this rather opaque market. If you want to read more, Matt Levine (Bloomberg Opinion) has covered this story very well, and his latest article is here.
The G20 completed its sessions in Bali without incident.
As far as financial markets in the US, the week will be sliced in half more or less by the Thanksgiving holiday (markets closed) on Thursday.
And perhaps most important of all, the World Cup kicks off in Qatar on Sunday, with a series of juicy group stage matches throughout the week. For my followers in the UK and US, brace for the USA vs England match on Friday!
MARKETS THIS WEEK
US equities were lower on the week, with the recurrent 2022 theme of the NASDAQ getting hit the hardest re-emerging after an amazing 8.1% gain the week before. The culprit – as mentioned in the “Summary” section – was Fed-speak, with the calvary arriving just in time to quell any emerging optimism. Even as yields headed higher at the short end of the curve throughout the week, Friday ended on a positive note, with decent gains in US stock indices, cutting WoW losses across the board. Elsewhere, European equity markets were slightly better WoW, outperforming US equities. The US Dollar stabilised and slightly strengthened this week after getting clobbered the week before. Bitcoin was down again, but it could have been (and might still end up getting) worse. The big price action this week though was in crude oil, with WTI crude ending the week at $80.11/bbl, down nearly 10% WoW. The signals as far as the direction of the US (and global) economy are getting stronger as far as portending an economic slowdown, including the most negative 2y-10y yield difference we have seen since 1981, and a sharp decline in oil prices. Both are suggesting there will be demand destruction down the road as financial conditions tighten.
The table below contains the summary of price action this week and since the beginning of the year of indices and assets I track.
WHAT MATTERED THIS WEEK
UK and Eurozone inflation
UK CPI came in at 11.1% for October, up from 10.1% in September, and an increase of 2.0% in October MoM. It is clear that monetary tightening by the Bank of England is showing no signs yet of bringing inflation under control, bad timing as the UK economy is already shrinking. See “Consumer price inflation, UK: October 2022” from the ONS.
Eurozone and EU inflation also increased in October, according to Eurostat (release here). Eurozone inflation was 10.6% in October (vs 9.9% in Sept), whilst EU inflation increased to 11.5% in October (vs 10.9% in September). Central European countries (outside the Euro) were the biggest contributors to EU inflation, but as with the UK, the story is not pretty in Europe, either.
US PPI and retail sales
US PPI was released on Tuesday, and you can find the release from BLS here. As with October CPI released the week before, PPI came in lower than consensus expectations, causing investors to increase their bets that the Fed would back off its tightening regime earlier than had been expected. However, a series of Fed speakers later in the week more or less put this dose of optimism to rest.
US retail sales also came in stronger than anticipated, another sign that the battle against inflation in the US has a ways to run. You can find the US Census Bureau advanced estimates of US retail and food sales for October here, which showed stronger retail sales in October after the September read was virtually flat. Consumers are still spending, and until this abates, inflation will continue to be problematic Stateside.
FTX gets ugly (or uglier), raises questions of contagion
An administrator came in to sort out the mess at FTX, and his early and very preliminary findings have been well-documented in the press. In summary, there appear to be very few assets available against a wall of liabilities. In a multitude of respects, it is clear that there was no governance to speak of at the company. You have to ask yourself how so many smart investors (and celebrities) got duped.
Below are some of the key data releases and other financial events that matter for the weeks ahead.
Thanksgiving is on Thursday this week, meaning that we are looking at more or less a half week in the US. Black Friday follows Thanksgiving, and this weekend will be a huge barometer of the continued strength of the consumer.
As far as economic data, most focus will be on the first three days of the week. The US, Eurozone and UK all get November preliminary PMI manufacturing and services reads this week. In addition, new home sales and durable goods orders for October for the US will be released on Wednesday.
The minutes of the last FOMC meeting (Nov 1-2) will be released on Wednesday.
The World Cup in Qater starts on Sunday, with some juicy group stage matches this week (including USA vs England on Friday).
Upcoming central bank meetings:
Federal Reserve – Dec 13th-14th
Bank of England – Dec 15th
ECB – Dec 15th
Bank of Japan – Dec 19th-20th
Corporate bonds (credit)
Safe haven and other assets
 Let me digress and direct you to the New York-based band Talking Heads, which were famous in the 1980s. I used their the album cover from “Remain in Light” for this weekly update. Not only does their name appropriately fit the weekly summary, but how about this gem from the past which is equally appropriate: “Burning Down the House”.