10/14/22 – Higher Hurdle for Fed Pause, Lower Hurdle for Nobel Prize
There was precious little for the Fed to celebrate this week. The all-important employment report has been relegated to second tier status as the producer and consumer inflation measures take center stage as the most important measure of the Fed’s success, or as is the case in this week’s report, failure. Both measures came in above expectations and didn’t really offer any indication that the rate hikes to date have been successful. The markets reacted mostly as expected. The 30-year bond, after a brief short covering rally on the day of the CPI release is closing the week just a basis point below 4.00%. Similarly, the 2-year note is closing the week at 4.50%. Fed Fund futures reset materially higher, with the May 2023 contract indicating a peak Fed Funds rate of 4.935%.
The equity market staged a similar short covering rally on the day of the CPI release, initially punching through the low of 2023 before staging a blistering rally to end the day close to the session high. Investors should be cautious of that market action as the selling has returned today and the market feels heavy as we ease into the weekend.
The earnings parade started in earnest this morning with J.P. Morgan posting record net interest income and besting expectation, despite a sequential decline in net income compared to the same quarter last year. Morgan Stanley and Citibank also beat expectations but also saw a decline in year over year earnings. The message from Morgan Stanley was most ominous as they communicated that jobs cuts are on the horizon. For those employees that were reluctant to return to the office we wish you good luck.
Next week is all about housing as the various entities release the housing market index, building permits, housing starts, and existing home sales. With mortgage rates topping 7.0%, we don’t expect upside surprises from any of those reports.
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