Stocks go up, stocks go down. Interest rates change, housing trends ebb and flow. How do you keep up with the markets and economy? Vizo Financial offers weekly and monthly market commentaries to keep your credit union apprised of the current economic and market trends. Read the latest now!
Has the inflation worm turned? It’s still early, but the signs are encouraging as an expanding list of price measures are pointing to slower increases. Whether this favorable trend continues is an open question; many factors underpinned the astonishing inflation cycle of the past two years and many don’t fit into conventional economic models that make predictions a bit easier. This is not a garden-variety demand/supply imbalance that traditional policies are designed to handle. Instead, the economy has been blindsided by a barrage of surprising external shocks linked to the pandemic, a disruptive war and climate changes – all of which continue to wreak havoc on prices. Indeed, the drying up of the Mississippi River – a major transportation conduit in the U.S. – is just the latest reminder to never count out the unexpected.
The alarm bells warning of a recession ring louder with each rate hike by the Federal Reserve. So far this year, there have been plenty – five since March and still counting. Following the last three jumbo-sized 0.75 percentage point increases, the Fed’s benchmark short-term rate now stands in a range of 3-3.25 percent, which is well above the 2.5 percent peak reached during the last tightening cycle, spanning the pre-pandemic 10-year expansion. But the previous rate-hiking campaign, which began in December 2015, took three years to accomplish, including more tempered quarter-point increments. This one has been faster and far more aggressive than any since the 1980s.
Consumers are getting an early start to their holiday shopping, as sales at retailers were considerably stronger than expected in October. It remains to be seen if households pulled forward purchases that normally would take place in November and December, or if the strong October reading is a sign that holiday sales will be particularly festive this year. A lot is at stake, as the strength or weakness of consumer spending will go a long way towards determining the resilience of inflation and how vigorously the Fed will fight the inflation battle.
Politics and inflation took center stage this week. While Wall Street abhors surprises and uncertainty, both were on full display, injecting more turbulence into the markets than seen in some time. In fact, some Treasury yields underwent the biggest one day drop in more than a decade on Thursday, while stock prices whipsawed violently on Wednesday and Thursday, when they staged the strongest daily gain since early 2020. Things calmed down on Friday, as the bond market closed for the Veterans Day holiday. Stocks extended Thursday’s rally, however, ending the week a solid 5.9 percent higher and leaving Wednesday’s 3.2 percent plunge in the S&P 500 in the dust.
It's rare that the Federal Reserve holds its policy-setting meeting the same week that the jobs report is released. Each is a headline-grabbing event on its own; when they appear so close together, as was the case this week, the stage is set for fireworks. Unsurprisingly, the financial markets lit up this week, featuring sharp moves in both stock prices and yields. By week's end, the former was down and the latter up, reflecting evolving perceptions regarding monetary policy and the overall health of the economy.
News that the economy resumed growth in the third quarter, following two quarterly contractions, landed with a loud thud this week. Investors and traders looked under the hood and found little to get excited about. For sure, nothing in the GDP report will sway the Fed to change its decision to raise interest rates at next week's FOMC meeting, when another outsized 0.75 percentage point increase is widely expected. Nor will it alter judgements as to whether the U.S. economy emerged from a first-half recession or whether it is moving closer towards one. Looking at the headline GDP, which met the common recession definition of two consecutive quarters of decline, the former perception would seem to be the case. Looking under the hood, however, the GDP report tracks the latter scenario to a tee.
This week's lean calendar of economic data focused mainly on the housing market. Since that's the most rate-sensitive sector of the economy, it should come as no surprise that the news was uniformly downbeat. As a time-honored leading indicator of recessions, the dismal readings on homebuilding activity and sales further solidified widespread perceptions that a downturn is just around the bend. Indeed, the consensus of economists expects a recession to occur at some point next year. We are on board with that outlook and believe it will unfold over the first half of 2023, albeit the peak to trough should be relatively mild barring a financial accident or some other shock that would dial up its severity.
It was another eventful week on the financial and economic fronts; market yields and stock prices swung widely in both directions, and Washington’s statistical mills generated more explosive data amid an already combustible landscape that is sure to keep policymakers on edge. There is still a myriad of questions about the health of the economy and how well it can navigate the headwinds and tailwinds that continue to nudge it in conflicting directions. But amid the fog of uncertainty, some themes are clearly coming into focus. Inflation continues to run hot, the Federal Reserve is primed to stick with its aggressive rate-hiking campaign and the risk of a recession looms larger than it did a week ago.