09/18/2023 Market Strategy
It Ain’t Over til It’s Over
Inflation’s persistence means the Fed has to stay vigilant
Key Takeaways
- All eyes on the Fed this week with its rate decision on Wednesday. We expect a “skip” rather than a hike.
- A higher-than-expected monthly change in the core inflation caused some weakness in equity markets that could persist ahead of this week’s Fed decision.
- Last week’s economic data pointed to the persistence of inflation that’s still running well above the Fed’s target.
- Concerns about the risks of a government shutdown along with the auto sector strike add to potential negative overhangs on market sentiment near term.
A relatively light calendar of economic data scheduled for release this week will likely find the Fed’s FOMC rate decision on Wednesday afternoon along with comments and Q&A with Fed Chair Powell after the meeting to serve as market participants’ central focus.
As the week begins expectations among market participants, economists and observers are for the Fed likely to opt to take another “skip” in the hike cycle process rather than opt for an upward tweak in rates on Wednesday. A rate cut remains pretty much out of the question for now but is still considered as very possible among market participants sometime next year.
Last week’s economic data pointed to the stickiness of inflation driven by the price of oil among other factors which contributed to a modest uptick in the core inflation rate (excluding food and energy) which rose by more than expected as oil and gasoline prices along with stickier food and used car prices proved less receptive to Fed policy thus far.
While a “skip” in rate adjustment seems likely this week one more rate hike this year and perhaps another next year in our view remains a possibility should inflation prove too sticky for the Fed to accept.
In our view even as the Fed appears to be nearing an end to the current rate hike cycle the stickiness evidenced in food, services, energy and other prices warrants the Fed remaining vigilant along with a potential for one more hike this year and perhaps another next year.
Continued weakness last week in stock prices and fluctuation in bond prices with US Treasury yields remaining close to this year’s highs—as investors sorted through the latest economic data, news on a very well-received IPO in the semi-conductor space, the introduction of the latest model of a widely anticipated smartphone by consumers along with developments tied to selective strike action by the UAW against the US “Big Three” auto makers— reminded us that “things” are indeed in flux as one should expect always. S&P 500 Q2 Earnings Season wrap
S&P 500 Q2 Earnings Season wraps
Q2 earnings season for the S&P 500 came to a close last week with earnings off 5.84% on back of a 0.95% increase in revenues. While earnings on an aggregate level fell, a glance under the hood showed that the weakness was concentrated across three of the benchmark’s 11 sectors.
Energy, Materials and Healthcare saw earnings fall respectively in the period by 52%, 29.25% and 27.4%.
Eight of the S&P 500’s 11 sectors saw earnings rise in Q2 with Consumer Discretionary, Communications Services, Industrials, Real Estate, Consumer Staples, Financials, Information Technology and Utilities showing respective increases in earnings of 35.2%, 13.8%, 8.92%, 8.8%, 5.8%, 5.8%, 3.7% and 1.8%, respectively.
With a better than expected Q2 earnings season in the rear mirror and Q3 earnings season not set get underway until October 13 when the big US banks begin reporting, economic data and day to day corporate news will likely provide the signal and the noise near term for investors and the markets to navigate, along with news from Washington as politicians work to negotiate deals under deadline pressures and central banks in the US and elsewhere (this week in Europe and Japan) address challenges to economic growth with monetary policy decisions.
Concerns about the risk of a government shutdown stateside are set to get increased attention in the headlines and by the markets this week as the Federal government approaches its September 30 end of fiscal year.
With Republicans and Democrats yet to arrive at an agreement on government spending the likelihood of some drama over the course of the next two weeks is to be expected. That said with a big election year in the not too distant future it would seem to us that an agreement of sorts is more likely among politicos than a shutdown as the constituencies of both sides of the aisle in Congress are not likely to suffer foolish decisions lightly.
In our view few politicians are likely to opt for a decision that could result in political career suicide by voting to shut down the US government. It would seem that US voters after exiting the COVID19 pandemic and managing through what remains of an inflationary period of 40-year highs would deal harshly when voting with those responsible in causing a government shutdown.
We remain positive in outlook for equities with prospects for a hard landing diminished as the Federal Reserve remains on the job to put inflation in check while remaining sensitive as to the effects of practicing its mandate on an economy that remains resilient if not robust.
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