Halyard’s Weekly Wrap – 09/16/22 – Where there’s smoke…

The best that can be said about this week, from a business perspective, is it’s over.  Traders came into the week optimistic with hopes sustained from the August employment situation.  We anticipated that the CPI would finally show a downtick and the relentless pressure on interest rates would finally moderate, but that did not come to pass.  Instead, CPI printed an unwelcome uptick across most categories and reinforced the need for higher interest rates.  While the Fed sat on the sidelines post-report, bond traders acted decisively, pushing the 2-year note 20 basis points higher on the day, ultimately ending the week 32 basis points higher.

The worse than expected inflation report torched the equity narrative that the Fed is close to an equilibrium point in overnight rates.  Equity investors had interpreted that as meaning that they are closer to their first rate cut, all of which was seen as a reason to buy stocks.  Instead, the S&P 500 tumbled more than 5% for the week.

The disappointing news continued with the release of the Retail Sales report on Thursday.  The disappointment came from what analysts had hoped would be a solid offset to inflation.  Instead, Retail Sales for July were revised sharply lower, and month-over-month sales for August were below expectation versus the lowered previous months tally.

After the closing bell on Thursday, FedEx preannounced their earnings to disclose an absolutely abysmal quarter, based on what they termed a global slowdown in economic activity.  According to a Deutsche Bank analyst, the FedEx miss, relative to their expectations, was the worst in 20 years.  This is especially poignant as equity investors seemed to have concluded that the worst of the slowdown was behind us and that it was safe again to go long stocks.  Several analysts have suggested that the sub-par results were specific to the company and not a harbinger of more bad earning to come.  We hope that to be the case but, “Where there’s smoke…”

Next week brings more data on the housing market and more importantly, the FOMC decision. Another 75 basis point rate hike is a virtual lock, with the post-meeting press conference offering clues as to what the next step will be.  We think another 75 basis points at the November meeting is likely, which will bring the overnight rate corridor to 4.00%.  Hopefully it doesn’t tank the economy just before the holidays.