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Signs of Peaking Inflation

By on Dec 09 in highlights, Market Update

Quick Take: As markets focused on the possibility of slower rate hikes, stocks experienced their first back-to-back monthly gains since 2021, and bonds rallied.[1]

Despite remaining elevated, inflation growth as measured by the October consumer-price index eased to the slowest pace since January, a welcome relief in the Fed’s ongoing battle to tame prices.[2]

Stocks trended higher over the month, topped off by a strong rally on the final day, after the Fed confirmed slower interest rate hikes may be appropriate.[3] The S&P 500 index rose 5.4% in November for back-to-back monthly gains, and Treasury yields fell (prices higher) across maturities.[4]

The result of the mid-term elections, with Republicans gaining control of the House of Representatives while Democrats held the Senate, is likely to limit major policy shifts and cause gridlock.[5] This outcome is seen as positive for markets.

In this note, we’ll review the latest Fed updates, opportunities in bonds, and easing supply chain pressures.

 

A Pivot Mirage?

Earlier in the month, markets careened in both directions as hopes for a Fed pivot to rate cuts came and went.[6] Senior Bloomberg editor John Authers called it a “pivot mirage” that has been enticing investors (and perhaps been somewhat overdone) all year.[7] Markets have been eager for the Fed to tap the brakes on tightening monetary policy.

After delivering a rapid four consecutive interest rate hikes of 75bps (including the November hike), Fed chair Jay Powell confirmed that smaller interest rate hikes are likely ahead, as soon as December.

Although Powell’s remarks ignited a rally in equity and bond markets, he reiterated that monetary policy would stay restrictive for some time and “Despite some promising developments, we have a long way to go in restoring price stability.”[8][9] He was quick to highlight that what matters most is the level rates rise to and how long they remain elevated.[10]

Markets expect the fed funds rate to reach just below 5% by May 2023 and that the Fed may cut half a point by the end of next year.[11] These expectations will continue to adjust as data emerges.

Source: https://www.chase.com/personal/investments/learning-and-insights/article/tmt-december-two-twenty-two

 

Bonds are Back

Global bonds enjoyed their best month of performance since the great financial crisis.[12] Investors see value in bonds for the first time in a decade, according to Bob Michele of JPMorgan Chase, as higher yields (lower prices) make fixed-income investments look more appealing.[13]

For context, yields on the benchmark Bloomberg bond aggregate index soared to 4.7% from 1.75% at the end of 2021 during the Fed’s aggressive rate hikes.[14] Bonds issued at higher interest rates offer income-seeking investors appealing streams of income.

Bonds also look attractive because a recession is looking increasingly likely. PIMCO believes a shallow, mild-to-moderate recession, during which core bond returns have  historically been positive.[15] Higher quality bonds like investment grade corporate bonds and municipal bonds that exhibit lower default risk may look appealing during a slowdown.

Source: https://www.wsj.com/articles/fading-supply-chain-problems-signal-season-of-plenty-for-holiday-shoppers-11668681001

 

Easing Supply Chain Pressures

As we head into the thick of the holiday shopping season, consumers will be relieved to find supply chains have largely returned back to “normal” after two years of disruptions.[16] The Federal Reserve Bank of New York’s Global Supply Chain Pressures Index slid to its lowest level in nearly two years in October.[17]

In another sign that supply chain snarls have turned a corner, the cost of sending a standard 40-foot container from China to the US West Coast is down over 90% from a September 2021 peak of $20,586 to $1,935.[18]

There may still be pockets of difficulty – Bloomberg reports that Chinese Covid lockdowns and related disruptions may force Apple to lower expected production by 6 million iPhone Pros, though they expect to make up the deficit in 2023.[19] China is starting to ease its stringent Covid-zero policy to address frustrations and economic fallout.[20]

Consumers have been more than ready to welcome stocked shelves. Over the popular holiday shopping weekend, both Black Friday and Cyber Monday sales rose.[21] Because it powers two-thirds of the US economy, consumer spending is giving the economy a boost against the headwinds of tightening monetary policy.[22]

As supply chains function better and shipping costs moderate, key indicators suggest that global inflation has peaked.[23]

Source: https://www.ft.com/content/85498afc-43d3-4525-bee0-7ea7c6c05b34

 

What does this mean for the financial markets? According to Goldman, although nuances are present today, cooling inflation from a high level has historically been associated with positive real returns for both equities and bonds.[24]

 

Looking Ahead

Lower inflation prints are good news, but it’s still too early to declare complete victory over rising prices. Strength in the labor market will be monitored closely for signs of wage inflation. The Fed meets a final time for the year Dec 13-14, where they may hike interest rates another 50bps.[xxv]

As the impact of Fed rate hikes filters through the economy, market volatility will likely be driven by incoming data, Fed policy, and potential earnings readjustments.

While investors may seek a crystal ball, the next best solution is carefully managing risk and aligning your portfolio with long-term goals. To that end, please call to schedule your year-end review soon!

Before 2022 closes, you may also want to act on these tax strategies. Please don’t hesitate to contact us with any questions about your financial objectives or your investment portfolio.

Finally, we’d like to express our gratitude for being able to work with you to reach your financial goals. We appreciate the trust and confidence you have in us and hope the holiday season brings you a wealth of joy and happiness together with your family and friends!

 

Your Friends at JSF

 

 


The information expressed herein are those of JSF Financial, LLC, it does not necessarily reflect the views of NewEdge Securities, Inc. Neither JSF Financial LLC nor NewEdge Securities, Inc. gives tax or legal advice. All opinions are subject to change without notice. Neither the information provided, nor any opinion expressed constitutes a solicitation or recommendation for the purchase, sale or holding of any security. Investing involves risk, including possible loss of principal. Indexes are unmanaged and cannot be invested in directly.

Historical data shown represents past performance and does not guarantee comparable future results. The information and statistical data contained herein were obtained from sources believed to be reliable but in no way are guaranteed by JSF Financial, LLC or NewEdge Securities, Inc. as to accuracy or completeness. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy. Diversification does not ensure a profit or guarantee against loss. Carefully consider the investment objectives, risks, charges and expenses of the trades referenced in this material before investing.

Asset Allocation and Diversification do not guarantee a profit or protect against a loss.

The Bloomberg Barclays U.S. Aggregate Bond Index measures the investment-grade U.S. dollar-denominated, fixed-rate taxable bond market and includes Treasury securities, government-related and corporate securities, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities.

The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.

The Nasdaq Composite is a market-capitalization-weighted index consisting of all Nasdaq Stock Exchange listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds or deben­ture securities.

Treasury Bond- is a U.S. government debt security with a fixed interest rate and maturity between two and 10 years.

Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period. GDP is the most commonly used measure of economic activity.

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[1] https://www.ft.com/content/3c5bf724-8113-4755-bc35-7626e7e6f8f1

[2] https://www.wsj.com/articles/us-inflation-october-2022-consumer-price-index-11668050497?mod=article_inline

[3] https://www.ft.com/content/3c5bf724-8113-4755-bc35-7626e7e6f8f1

[4] https://www.chase.com/personal/investments/learning-and-insights/article/tmt-december-two-twenty-two

[5] https://news.yahoo.com/higher-rates-mean-bonds-back-000308874.html

[6] https://news.bloombergtax.com/tax-insights-and-commentary/the-pivot-mirage-keeps-running-into-macro-reality-john-authers

[7] https://news.bloombergtax.com/tax-insights-and-commentary/the-pivot-mirage-keeps-running-into-macro-reality-john-authers

[8] https://www.cnbc.com/2022/11/30/fed-chair-jerome-powell-says-smaller-rate-hikes-could-come-in-december.html

[9] https://www.reuters.com/markets/us/feds-powell-rate-hike-slowdown-possible-next-month-inflation-fight-far-over-2022-11-30/

[10] https://www.nytimes.com/live/2022/11/30/business/powell-fed-interest-rates

[11] https://www.cnbc.com/2022/11/30/fed-chair-jerome-powell-says-smaller-rate-hikes-could-come-in-december.html

[12] https://www.chase.com/personal/investments/learning-and-insights/article/tmt-december-two-twenty-two

[13] https://news.yahoo.com/higher-rates-mean-bonds-back-000308874.html

[14] https://news.yahoo.com/higher-rates-mean-bonds-back-000308874.html

[15] https://www.pimco.com/en-us/insights/blog/higher-bond-yields-can-be-fundamental-to-a-recession-investing-playbook

[16] https://www.wsj.com/articles/fading-supply-chain-problems-signal-season-of-plenty-for-holiday-shoppers-11668681001?mod=article_inline

[17] https://www.wsj.com/articles/fading-supply-chain-problems-signal-season-of-plenty-for-holiday-shoppers-11668681001?mod=article_inline

[18] https://www.washingtonpost.com/business/2022/12/04/inflation-prices-going-down/

[19] https://www.cnbc.com/2022/11/28/apple-stock-down-on-report-of-iphone-production-shortage.html

[20] https://www.wsj.com/articles/china-eases-some-covid-19-rules-even-as-cases-pass-10-000-11668150369

[21] https://www.cnbc.com/2022/11/29/shopper-turnout-hit-record-over-black-friday-weekend-trade-group-says.html

[22] https://www.reuters.com/markets/us/us-consumer-spending-solid-october-weekly-jobless-claims-fall-2022-12-01/

[23] https://www.cnbc.com/2022/11/28/apple-stock-down-on-report-of-iphone-production-shortage.html

[24] https://www.gsam.com/content/gsam/us/en/individual/market-insights/market-strategy/market-know-how/2022/market-know-how-edition2.html#section-knowhow_8292_4

[25] https://www.cnbc.com/2022/11/16/feds-waller-says-hes-open-to-a-half-point-rate-hike-at-december-meeting.html

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