ClearWater Market Commentary as of November 4th, 2022

Here is the ClearWater Market Commentary as of November 4th, 2022:

In this issue:
– Performance of Major Indices
– Market Commentary
– Last Week’s Key Economic  Events and Upcoming Events

Performance of Principle Indexes: 

^{As of 2022/11/04 – Source: www.marketwatch.com}

^{As of 2022/11/04- Source: www.marketwatch.com}

Last week’s and next week’s key economic events:

US economy (S&P 500 -3.30%):

• Stocks fell after the Federal Reserve dashed market hopes for an impending pivot in monetary policy in the form of a pause or slower pace of rate hikes. The technology-heavy Nasdaq Composite Index was hit particularly hard as growth stocks declined more than value companies. The Dow Jones Industrial Average held up much better, extending its relative outperformance from October.
• Tech stocks suffered as the fallout from a largely disappointing earnings season for bellwethers such as Facebook parent Meta Platforms, Amazon.com, and Microsoft continued.
• Late in the week, Amazon.com announced that it was pausing its corporate workforce hiring, further dampening sentiment. Although it is now a private company, the deep job cuts expected at Twitter under new owner Elon Musk added to the malaise of the tech sector.
• Wednesday’s Federal Open Market Committee (FOMC) announcement and Fed Chair Jerome Powell’s post-meeting press conference were the focus of the week. Stocks were little changed until the release of the post-meeting statement, but as was widely expected, the committee said that it was raising rates by 75 basis points. 
• The statement referred to the FOMC taking cumulative policy tightening into account and being aware of the lagged effects of monetary policy, which markets took as a dovish signal, briefly pushing stocks higher.
• However, Powell’s press conference took a hawkish turn. He said that the FOMC had revised its estimate of the terminal rate (the highest federal funds rate in the hiking cycle) up from its September projections, and he referred to the pace of hikes not being as important as the terminal rate or how long rates stay there. Notably, Powell stated that it is “very premature” to consider pausing rate hikes, and the S&P 500 Index finished the day down 2.50%.
• On Friday, stocks wavered after the October employment report painted a mixed picture of the labor market. The Labor Department report showed that employers added 261,000 jobs to nonfarm payrolls, above consensus estimates, and revised its September jobs figure higher. However, the unemployment rate rose to 3.7% from 3.5% in September as the labor force participation rate moved slightly lower.

Canadian markets (S&P/TSX -0.11%):

• Canada equities were higher at the close on Friday, as gains in the Materials, Financials and REITS sectors propelled shares higher.
• As last week’s tech earnings bonanza wrapped up for the US, former software darling Shopify (SHOP/TSX) announced surprising earnings news and bucked the negative trend lines seen by its American tech counterparts.  
• Canadian merchandise trade surplus (Sept.) widened to $1.14 billion (versus $1.20 billion expected) from a downwardly revised $0.55 billion in the prior month. 
• Canadian employment (Oct.) rose 108,300 (versus 10,000 expected), following the prior month’s 21,100 gain. The unemployment rate held steady at 5.2%, largely due to a 0.2% increase in the labour force participation rate to 64.9%. Average hourly wages accelerated to 5.6% y/y from 5.2%
• The Canadian dollar traded for 74.05 cents US compared with 72.73 cents US on Thursday.
• The December crude oil contract was up US$3.65 at US$91.82 per barrel and the December natural gas contract was up a nickel at US$6.02 per mmBTU.
• The December gold contract was down US$45.60 at US$1,676.50 an ounce and the December copper contract was up a quarter at US$3.67 a pound.

Performance 2022: S&P 500 Sectors   

Forward P/E Ratios: S&P 400/500/600 Sectors

European and Asian economies:

• Shares in Europe rose for a third week running, as central banks signaled that they may curb the pace of rate increases. Investor sentiment also received a boost from hopes that China might walk back its zero-COVID policies. 
• Year-over-year inflation in the eurozone accelerated by more than expected to 10.7% in October from 9.9% the previous month, fueled by higher energy prices. Food and imported industrial goods prices also rose sharply. The core rate, which excludes volatile food and energy prices, increased to 6.4% from 6.0%. Meanwhile, an early estimate showed gross domestic product growth expanded 0.2% in the third quarter, a slowdown from the 0.8% growth rate recorded in the April through June period.
• The BoE increased its benchmark interest rate by 0.75 percentage point to 3%, the highest level since 2008, to contain inflation. BoE Governor Andrew Bailey said he would make no promises about future increases but signaled that borrowing costs may not rise by as much as the market expects. The BoE also warned that the UK faces a “very challenging” two-year slump and predicted that inflation would stay above 10% for the next six months and above 5% in 2023. Against this backdrop, the central bank forecasts that unemployment may rise to almost 6.5% by 2025.
• Speculation on the taxes that may be unveiled in the November 17 budget ran rife in the media this week. Newspapers and television channels cited unnamed government officials as saying that UK finance minister Jeremy Hunt is considering whether to raise taxes on dividend income and capital gains tax. Other options reportedly could include increasing a proposed windfall tax on oil and gas company profits to 30% from 25% and extending this levy to include electricity generators.
• Equity market returns in Japan were positive for the week, with the Nikkei 225 Index gaining 0.35% and the broader TOPIX Index up 0.86%. Sentiment was supported by data showing expansion in Japan’s services sector in October and some speculation about China’s reopening. The U.S. Federal Reserve’s hawkish stance curbed gains somewhat.
• The yen weakened to around JPY 148.0 against the U.S. dollar, from about 147.5 the prior week. The currency has come under pressure due to the Fed’s monetary policy tightening. Authorities have intervened on several occasions to prop up the yen.
• Japan’s services sector expanded at a stronger rate in October, according to fresh Purchasing Managers’ Index (PMI) data from au Jibun Bank. Activity levels were supported by the reopening of the domestic economy following the coronavirus pandemic. Service providers registered among the highest levels of confidence that prevailing demand conditions would continue. Price pressures continued to pose a headwind, however. Meanwhile, in the manufacturing sector, both output and new orders contracted.
• Minutes of the BoJ’s September Monetary Policy Meeting suggested that Japan’s economy had picked up as activity had resumed and public health had been protected from COVID-19, although rising commodity prices continued to have a negative effect. While supply side constraints have lessened, leading to an increasing trend in exports and industrial production, the outlook remains clouded by the slowdowns in overseas economies. There were some signs that private consumption had returned to a moderate upward path, with consumer confidence rising slightly month on month.
• Prime Minister Fumio Kishida’s government made an electricity-saving request ahead of the onset of winter, asking households and businesses to cut consumption. Amid tight electricity supply, the government has asked for idle thermal power plants to be reactivated, as well as speeding up efforts to restart nuclear reactors.
• China’s stock markets rallied amid speculation that the country was preparing to relax its zero-tolerance approach to the coronavirus. An unverified report widely circulated on social media stated that high-level officials met the prior weekend at the request of President Xi Jinping to discuss a conditional opening plan aimed at substantially opening by March 2023, Bloomberg reported. Separately, a report in a state-run newspaper stated that China must strive to control coronavirus outbreaks and “correct mistakes from overly strict measures that have caused damage to people’s properties and lives.”
• Signs of progress in a longstanding auditing dispute between the U.S. and China also bolstered sentiment. U.S. audit officials completed their first on-site inspection round of Chinese companies ahead of schedule, with dozens of accounting inspectors scheduled to leave Hong Kong over the weekend, Bloomberg reported. The news was seen as a positive development in the years-long standoff over the audit inspections of publicly traded companies in the U.S. that threatened to kick off hundreds of Chinese companies listed on U.S. exchanges. However, the U.S. will likely take its time to file an initial report on its findings and could seek additional information from China, analysts believe.
• In economic news, official PMI readings for manufacturing and non-manufacturing activity in October both missed forecasts and landed below 50, the level separating growth from contraction. The private Caixin PMI readings also remained in contractionary territory, although the manufacturing PMI rose slightly last month. Taken together, the data indicated the toll of China’s protracted coronavirus restrictions on the economy.

What to watch this week:

• US Midterm Elections
• US inflation data
• Chinese trade, money supply, inflation and aggregate yuan financing data
• Bank of Japan Summary of Opinions from the October meeting
• Eurozone retail sales
• Germany inflation data
• UK GDP, industrial production and trade data
• Bank of Mexico monetary policy meeting.
• 31 S&P 500 and 115 S&P/TSX companies report earning

Sources: Bloomberg.com,Yardeni.com, Barron’s.com, Factset.com and Newyorkfed.org

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