Market Monitor: October Mid-Month Update
Headlines and Highlights
- High inflation stymies expectations again: The Consumer Price Index rose more than forecast in September, a setback for hopes the Federal Reserve’s ramp-up of interest rates would pay off in meaningfully lower inflation this fall. Core inflation climbed 0.6% for a second straight month and was up 6.6% over a year ago while overall CPI was up 8.2% year-over-year despite lower prices for gasoline and used cars. Other indexes are trending to lower inflation, however, which should show up in future readings as the rate hikes work their way through the economy.
- Job market decelerating but remains strong: Job growth slowed to a still-solid 263,000 positions added by U.S. employers last month and unemployment fell to a pre-pandemic low of 3.5%, testifying to the labor market’s continuing resilience. A related measure showed total job openings down sharply to 10.05 million while remaining at a historically high level, a 10% monthly drop that bodes well for the Fed’s effort to moderate economic activity.
- IMF reduces global growth outlook: The International Monetary Fund predicted slower growth than previously expected for the world economy next year but stopped short of predicting a global recession, projecting most countries to have positive growth. The fund reduced its global growth prediction to 2.7%, down from 2.9% in July, and said the three largest economies – the United States, China and the euro area – will continue to stall amid persistent inflation, Russia’s war in Ukraine and China’s slowdown.
Chart of Interest
Labor market showing more slack: Job openings are coming down from the March peak.
Sources: Federal Reserve Bank of St. Louis, Altair Advisers
- September’s hot inflation reading appears to have ensured another three-quarters-percent rate hike by the Federal Reserve on November 2nd, followed by a December increase that the market consensus pegs at the same magnitude. That would push the federal funds rate to 4.5%-4.75% by year-end – very close to the 4.75%-5% range the market now anticipates will be the terminal rate for this hiking cycle.
- Volatility in the markets continues to be extraordinarily high by historical standards. Eighty-eight percent of trading days in 2022 have had an intraday range greater than 1% as of this month. With central banks moving from accommodative monetary policies to more restrictive policies to fight inflation, this has been by far the most volatile year since 2009.
- Stocks are mostly higher so far this month after a series of wild swings in both directions. The benchmarks for both U.S. large caps and international developed stocks both added 2.6% through Monday. U.S. small caps led the way with a 4.3% gain in October and emerging-markets stocks were up 0.1%. Our municipal bonds benchmark gained 0.6%, while taxable bonds (-1.3%) and REITs (-1.5%) both added to this year’s substantial losses amid the latest rise in rates.
- U.S. factory output rose for a third consecutive month in September, underscoring the economy’s health and the strength of manufacturing after a slump earlier this year. Despite softening consumer demand for merchandise, the report on industrial production showed solid business investment which has helped to boost factory activity.
- A wide majority of U.S. CEOs surveyed by The Conference Board in late September and October said they anticipate a recession in the next 12 to 18 months. However, 85% said they expect it to be brief and shallow, with limited global spillover. With the S&P 500 down more than 20% this year, we believe a mild recession already is largely reflected in current market prices.
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