A wave of fundamental data will drive the next move for markets

Thoughts

• Equity markets remain subject to emotional swings, with the S&P 500® Index gaining for just the second time in eight weeks. The S&P 500 has seen directional moves of greater than 1% in more than half of sessions this year, including seven of the past eight. Markets surged at the beginning of the week, with the first back-to-back gains of 2.5% since 2008 on hopes for a dovish pivot by the Fed, though that rally lost momentum by week’s end as those hopes faded. Recent Fedspeak was clear that neither financial market volatility nor slowing global growth will deter them from raising rates. Investors appear resolved to a 0.75% hike in November and a terminal rate of roughly 4.7% versus the current (3.25%), implying an additional 0.75% by March.
• The primary concern of investors continues to gradually shift from inflation worries to concern over global liquidity and economic growth. The Treasury’s Office of Financial Research measure of stress in U.S. markets jumped to the highest level since May 2020 while the MOVE Index (a measure of bond market volatility) is at the highest level since 2009. Bank of America warned that their Credit Stress Indicator is at a “borderline critical zone,” and that global central bank tightening could “break” the bond market.
• Market volatility has been a reminder that if one was buying equities in hopes of a Fed pivot, they are early, but selling based on inflation fears may be late. The direction of markets over the next several weeks will be driven by inflation, earnings, and third-quarter GDP.

News

• After weeks of volatility stemming from investors betting on the path of global growth and Fed policy, inflation and earnings will likely take center stage this week. The current consensus for CPI is 8.1% versus a year ago, with core (excluding food and energy) at 6.5%, which would be an acceleration from August. Food prices have moderated, though energy prices have rebounded, wage growth remains elevated, and owners’ equivalent rent will continue to pressure results.
• Earnings season unofficially kicks off this week, with investor skepticism focused on the outlook for 2023 estimates. Bank earnings will lead the way, providing an update on consumer spending and credit trends. For the third quarter, growth is currently estimated at 2%, down from 10% at the beginning of the quarter. Supply chain and commodity pressures are easing, though labor markets remain tight and there is growing concern over demand. Investors are likely to focus more on the outlook for 2023 rather than third-quarter results. The current estimate is for 8% growth, and while estimates have trended down since May, earnings for 2023 are still forecast to be in line with what was expected a year ago when the market was 17% higher. It is unclear to the extent that a global slowdown, headwinds from the strong dollar, or higher corporate taxes are embedded in the 2023 estimate.
• Cracks are beginning to appear in the labor market. September payrolls rose by 263,000, in line with expectations but down from 315,000 in August. The unemployment rate fell to 3.5% from 3.7%, as the labor force participation rate fell. Wages rose 5.0% from a year ago, the slowest pace of the year and the 18th-straight month of negative real wage growth. Earlier in the week, the Job Openings and Labor Turnover (JOLTS) report showed a 10% sequential drop in job openings in the biggest monthly decline since April 2020. Quit rates remain elevated, rising by 100,000 in August. August saw 2.7% of employees voluntarily quit, while layoffs hit the highest level since March 2021. High-profile companies like Amazon, Walmart, and FedEx have recently announced layoffs or a hiring freeze.

What to Watch

A few third-quarter earnings reports will be released this week, though the true beginning of earnings season is next week. Economic data include the NFIB Small Business Index on Tuesday, PPI on Wednesday, CPI on Thursday, and retail sales and consumer sentiment on Friday. Minutes from the recent FOMC meeting will be released on Wednesday.