Market Update: November 4, 2022

Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.

 

The secular downtrend in the markets continue over the last two weeks. We did get a nice little relief rally for the month of October. But the Federal Reserve press conference earlier this week quickly popped that bubble.

In the news this week, payrolls grew by 261,000 in October with the unemployment rate ticking up slightly to 3.7%. Hedge fund tech giant, Tiger Global halted new investments into Chinese equities. And the Federal Reserve raised interest rates by 75 basis points, informing the market that rates will likely be higher for longer.

Despite the market weakness, the Federal Reserve meeting on Wednesday was not all bad news. Embedded in the press release was the first indication that the FOMC is thinking about thinking about pivoting based on cumulative tightening, lags in monetary policy, and future economic developments. This notion was received positively by the market for about 5 minutes before Chairman Powell indicated that there was no pivot.

The end result of the meeting was a dramatic change in expectations for the terminal rate endpoint. The terminal rate endpoint is the peak rate that the Fed reaches before pivoting from tight policy to loose policy. The expectations for that terminal rate quickly shifted yesterday from around 5% to nearly 6%. These expectations are wildly volatile and not accurate in the slightest. But the sentiment shift was dramatic.

Of course, the end game for the Fed is to push down the rate of inflation shown in purple by reducing the amount of money supply in the economy, shown in blue. As highlighted a couple of weeks ago, there is typically a 6 month to 2-year lag between the money supply and the rate of inflation. So hopefully we will get a reprieve from high inflation sometime soon.

However, utilizing the Inflation Nowcast tool from the Cleveland Fed, it doesn’t look like we’re going to get that reprieve for the month of October. Currently the Nowcast tool is expecting the inflation reading to be around .8% month-over-month, which is a fairly high inflation reading. If we were in a disinflationary environment, that redline would be down here.

Ultimately, this means the year-over-year reading will likely stay stubbornly around 8%.

So to summarize, Chairman Powell indicated that the terminal rate is likely going to be higher than expected and they will hold it there for longer. Probably somewhere around here where it will stay until this guy seriously starts to budge. Which means, expect higher rates for longer.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved November 4, 2022, from FactSet Database.

2.Federal Reserve Press Release. Federal Reserve System, Board of Governors. Released November 2, 2022 from https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

3.FactSet Research Systems. (n.d.). Policy Rate Tracker(Markts). Retrieved November 4, 2022, from FactSet Database.

4.FactSet Research Systems. (n.d.). M2 Money Supply & Total CPI YoY % (Interactive Charts). Retrieved November 4, 2022, from FactSet Database.

5.Federal Reserve Bank of Cleveland. Inflation Nowcasting. Monthly (month-over-month). Retrieved November 4, 2022 from https://www.clevelandfed.org/indicators-and-data/inflation-nowcasting

6.Federal Reserve Bank of Cleveland. Inflation Nowcasting. Monthly (year-over-year). Retrieved November 4, 2022 from https://www.clevelandfed.org/indicators-and-data/inflation-nowcasting

7.FactSet Research Systems. (n.d.). Fed Funds Target Rate & Total CPI YoY % (Interactive Charts). Retrieved November 4, 2022, from FactSet Database.

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