Hey Everyone, markets end the Quarter on another down note, three Quarters in a row. Get my take on what we can expect for the Fourth Quarter in this week’s round-up.
WEEKLY SOUND BITES:
Turmoil in UK financial markets and signs that the Feds still has some way to go in its efforts to temper inflation sent stocks to their third consecutive weekly decline as well as a rare (first time since 2009) three consecutive down Quarters…in addition we see the yield on the 10-year U.S. Treasury briefly breached 4% for the first time since 2008. The S&P 500 Index broke below its mid-June lows and fell back to November 2020 levels. And most of the risks we see in 2022, if you think about it are mostly policy induced, escalation of geo-political tensions, energy crisis mismanagement, supply chain knots, political divisions, and Central Bank Policy mismanagement.
Core (less food and energy) personal consumption expenditures (PCE) price index, widely recognized as the Fed’s preferred inflation gauge, rose at an annualized pace of 4.7% in Q2—well above expectations of around 4.4% as well as the Fed’s long-term 2.0% inflation target…and in August, we saw the monthly core PCE reading, also surprised on the upside, rising 4.9% on a year-over-year basis, up from 4.7% in July. Long-term inflation expectations appeared to remain anchored, however, with consumers polled by the University of Michigan expecting inflation to fall to 2.7% over the next five years, the lowest reading in over a year. The housing sector is feeling the immediate impact of the Fed’s rate hikes through rising mortgage rates—which breached an average of 7%—but even here the evidence was mixed.
Prices of U.S. Treasuries rallied after the BoE intervened to stabilize the UK government bond market, leaving the 10-year U.S. Treasury note yield modestly higher for the week.
After the BOE stepped in with their own version of Quantitative Easing, the IMF called on the UK to “reevaluate” the plan to ensure fiscal and monetary policy aren’t working at cross purposes. Revised economic data unexpectedly showed the UK avoided a recession in the three months through June. Gross domestic product (GDP) increased by 0.2% instead of shrinking 0.1% as previously estimated. Meanwhile, the ECB President Christine “Queen Bee” Lagarde said at a hearing of the European Parliament that the economic outlook “is darkening” and that she expects business activity to “slow substantially”. Inflation in the eurozone accelerated to a record 10.1% in September from 9.1% the previous month, according to an official first estimate. The figure exceeded a consensus forecast of 9.7% and reinforced market expectations for another large increase in interest rates in October.
The strengthening of the U.S. dollar against Asian currencies continued to weigh on market sentiment. The release of minutes from the Bank of Japan’s (BoJ) monetary policy meeting on Wednesday showed policymakers voted 8–1 to maintain a negative benchmark interest rate of -0.1%. They also confirmed that it will continue to purchase a necessary amount of Japanese government bonds.
In China, the Yuan fell to a 28-month low last Monday and has lost more than 11% against the greenback this year. The yuan is on track for recording its biggest annual loss since 1994. The PBOC asked state-owned banks to prepare themselves to defend the yuan by selling dollars from their foreign exchange reserves. On the economic front, profits at industrial firms shrank 2.1% in the first eight months of the year from the prior year period and the PMI fell to a worse-than-expected 48.1 in September from 49.5 in August, below the 50-point reading that separates growth from contraction. China’s financial markets were scheduled to be closed for the Golden Week holiday, a seven-day holiday starting October 1 that typically marks a peak period for travel and consumption.
Enjoy this week’s round-up
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