By Kelvin Lee, Alonso Munoz
Wow, what an eventful last week to end the quarter with. In case you were thoughtful enough to turn off the news, here were the headlines:
Hurricane Ian – Hurricane Ian hit Florida last Wednesday as a category 4. Major flooding and winds are expected to cost the state up to $80 billion in economic damage. Natural gas plants, refineries, and farms were hit in addition to houses.
Bank of England Intervention – The Bank of England (BOE), announced last week that it would temporarily be buying an unlimited amount of government bonds in order to “restore orderly market conditions”. 30-year UK government yields climbed past 5%, a negative reaction to UK PM’s Liz Truss’ budget which pledged $45B in tax cuts to be funded by more borrowing. What triggered the move? Rising yields. English pension funds were on track to be margin called to liquidate their GILT holdings for cash, which would have triggered a nationwide sell-off. PM Liz Truss has since walked back some of the tax cuts from her proposal.
Rates Rise, Equities fall – The 10-year treasury bond rose briefly past 4%, the last time this happened was during 2008. In response, the S&P500 fell to its 52-week low and broke through the 3,666-resistance level established in June. This will be the third consecutive quarter of decline in the index. Again, something not seen since 2008-2009. Another factor to watch was the volatility index, or the VIX, rising past 30 and indicating broad investor fear. Markets however are still behaving as expected and following our model of pricing in a 4.5-5% terminal fed funds rate.
Data, Data, Data –The core personal consumption expenditures price index (PCE) rose 0.6% for the month after being flat in July. Initial jobless claims, a measure we track as a precursor for the unemployment rate, fell from last month’s print to 193k. Many analysts were expecting claims to continue rising due to restrictive monetary policy. However, the strong labor market in our view is a result of declining consumer balance sheets in the lower to middle class which forces labor participation.
Overall, this week wasn’t good news for equities given the fed’s dual mandate and data reliance. With the fed’s preferred inflation metric of PCE rising and a strong jobs market, their tone is set to remain hawkish even as we sit in a technical recession.
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