The Dow Jones racked up the third weekly gain, and the remaining equity markets reversed from the previous week and recorded substantial gains. Better-than-expected earnings and, later in the week, a change in tone from one of the Fed Presidents suggesting a slowing in rate hikes might be in order supported investor enthusiasm. The energy sector rallied despite announcing another release from the Strategic Petroleum Reserve, while real estate came under pressure from weak data releases during the week. The bond yield hit 14-year highs on the 10-year US Treasury, rising to 4.33% early Friday morning on mixed signals from Fed comments.
In Europe, stocks posted strong gains early in the week with the UK government’s reversal of fiscal stimulus plans and later in the week with the resignation of UK Prime Minister Liz Truss. European bond yields rose ahead of a European Central Bank meeting from which analysts expect a rate hike of 0.75 percent intended to slow inflation after reaching decade highs on the continent. The European energy crisis could push inflation higher as industry and the consumer face higher energy costs and shortages caused by a lack of deliverable supply.
The New York Fed released the Empire State Manufacturing survey of business conditions in New York. Manufacturing activity fell 8 points to -9.1 in October, with twenty-three of the respondents reporting that conditions improved over the month, and thirty-three reported that conditions had worsened. The new orders index remained unchanged, while the shipments index fell twenty points to -0.3 after last month’s significant increase. Delivery times held, and inventories increased slightly. The future business index fell ten points to -1.8, indicating the firms that responded to the Empire State Manufacturing Survey do not expect business conditions to improve over the next six months.1
On Tuesday, the Fed released the September Industrial Production Index. The index increased 0.4% in September, with construction having the largest increase of 1.1% month over month and the mining index rose 0.6%, supported by the oil and gas sector. Utilities had the largest decrease, falling 0.3%, with an increase in gas utilities offsetting the reduction in electric utilities. Manufacturing capacity utilization rose 0.3% in September to 80.0% compared to the long-run average of 78.2%.2
Also, on Tuesday, the October NAHB Home Builders’ index fell 8 points to 38. Builder confidence for newly built single-family homes is now half the level six months ago and the lowest reading since August 2012 (excluding two months in the spring of 2020). Mortgage rates near 7% have impacted demand, and if the present trend remains in place, it could be the first time since 2011 that we see a decline in single-family home starts.3
The US Census Bureau reported on Wednesday that building permits for September rose 1.4 percent month-over-month. Approvals for multi-family buildings of more than five units jumped 8.2 percent, whereas single-family permits fell 3.1 percent.4
On Thursday, The National Association of Realtors reported existing homes sales fell in three of the four regions and held steady in the other region. The decline was the eighth consecutive monthly decline, contracting 1.5% in September from August and 23.8% below last year. The median home price increased 8.4% to $384,800, and inventory of unsold existing homes declined to an equivalent of 3.2 months.5, 6
On the labor front on Thursday, jobless claims fell 12,000 to 214,000 from the previous week. Continuing claims for all benefit programs also decreased by 30,879 to 1,223,968.7 The labor market remains tight even as labor is slowing with higher interest rates.
In another sign of slowing manufacturing, the Philadelphia Fed released the result of their region’s latest survey of business activity. The survey reported manufacturing activity in the region increased by 1 point but remained at -8.7, following a reading of -9.9 in the previous month versus an expectation of -5.8 Also, on Thursday, the Conference Board released the Leading Economic Index for the US decreasing 0.4 percent in September. The LEI is down 2.8 percent over the last six months. The Conference Board forecasts for GDP is 1.5 percent for 2022 and for GDP to slow even further in 2023.9
From our perspective, the latest data strongly indicates the economy is slowing, and a recession is inevitable if the trend continues and the Fed maintains its determination to squash inflation with higher rates. This environment would create an emotional roller coaster for investors and the corresponding reaction in equity markets. As the environment in Europe deteriorates, we believe capital is likely to move into North America despite weakening fundamentals, benefiting equities and supporting fixed-income markets.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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