ClearWater Market Commentary as of October 7th, 2022

Here is the ClearWater Market Commentary as of October 7th, 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 2022/10/07 – Source: www.marketwatch.com}

^{As of 2022/10/07- Source: www.marketwatch.com}

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

US economy (S&P 500 1.50%):

• Stocks ended higher for the first time in four weeks but surrendered most of their gains, as some data suggested that the economy was not slowing enough to satisfy Federal Reserve policymakers. 
• Energy was the standout performer in the S&P 500 Index as oil prices surged following a decision by major exporters to cut global production.
• Stocks bounced off nearly two-year lows on Monday and Tuesday, with the S&P 500 rising 5.6%, its best two-day move since 2020 and the third-best start to an October since 1930. 
• Some downside surprises in economic reports also boosted sentiment by raising hopes that the Fed might slow its rate hikes to tamp down on inflationary pressures.  
• Encouragingly, the Institute for Supply Management’s (ISM) reported that price pressures facing manufacturers fell to their lowest level since soon after the start of the pandemic, while nonmanufacturing prices rose at the slowest pace since January 2021. 
• Further calming inflation fears, job openings fell to their lowest level in over a year. A smaller-than-expected rate hike from the Australian central bank may have also boosted sentiment.
• Inflation worries seemed to resurface somewhat after the so-called OPEC+ group of oil exporters announced a 2 million-barrel per day cut in target production on Wednesday. Although many observers expect the actual cutback will be smaller, the benchmark price for a barrel of domestic oil rose by roughly USD 10 over the week, crossing the USD 90 mark for the first time since late August.
• Signs of labor market strength also seemed to deepen inflation fears. On Friday, the Labor Department reported that the economy had added 263,000 jobs in September, while the unemployment rate had fallen back to multiyear lows of 3.5%. More concerning may have been a surprise drop in the participation rate, to 62.3%, indicating that competition for available workers would remain intense. Nevertheless, the increase in wages appeared to be slowing, with average hourly earnings continuing to decline on a year-over-year basis to 5%, compared with March’s peak of 5.6%.

Canadian markets (S&P/TSX -0.21%):

• Canada’s main stock index ended down along with U.S. markets as central bank leaders emphasize the need to raise rates, while oil prices and energy stocks rose in reaction to news of production cuts by OPEC plus.
• The Canadian economy saw a modest bump in employment in September, while the unemployment rate fell to 5.2 per cent. 
• It is still predicted that the Bank of Canada will hike rates by half a percentage point at this month’s meeting, but the upcoming Business Outlook Survey and Inflation data could change that. The so-called bad news on employment, inflation or earnings might actually be good news for the market, as it could signal a coming end to rate hike
• The Bank of Canada’s governor Tiff Macklem held the line on rate hikes in a speech Thursday, saying more rate hikes are still needed to cool inflation, despite signs the market has been cooling in response to a series of aggressive hikes by the central bank.
• The Canadian dollar traded for 72.89 cents US compared with 73.31 cents US on Wednesday.
• The November crude contract was up 69 cents at US$88.45 per barrel and the November natural gas contract was up 4.2 cents at US$6.97 per mmBTU.

Performance 2022: S&P 500 Sectors   

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

European and Asian economies:

• Shares in Europe gained ground, following global peers, on hopes that central banks might start scaling back interest rate increases.  
• Germany’s 10-year government bond yields headed back toward recent highs, as minutes of the European Central Bank’s (ECB) September meeting showed policymakers are increasingly worried about high inflation, potentially paving the way for another large rate hike in October. Yields rose broadly in the eurozone.  
• The minutes from the ECB’s September monetary policy meeting showed relatively clear-cut support for aggressive action due to rising concerns about high inflation becoming entrenched. 
• Some policymakers initially backed increasing a key interest rate by 0.50%, but, after discussion, a “very large” number favored taking it up 0.75%. Some rate-setters backed a more modest move because the looming risk of recession might mitigate inflationary pressure and be sufficient to return inflation to target. 
• However, others argued that policy would remain expansionary even after a 0.75% hike and that this larger move would be a major step to frontload the transition from the prevailing highly accommodative policy and ensure a timely return of inflation back to target. Chief Economist Philip Lane, who has a track record of being dovish, proposed the larger move and indicated that further rate rises would be needed. Eurozone inflation accelerated to 10% in September.
• A higher-than-forecast jump in eurozone producer prices in August highlighted the upside risk to headline inflation. Price pressures continued to mount in September, the final version of S&P Global’s survey of manufacturing and services purchasing managers’ indexes (PMIs) showed.  
• Weaker-than-expected industrial output and retail sales for August suggested that the economic slowdown in Germany could be deepening.
• Following a rough September for Asian markets, the first full week in October saw a solid bounce, with Japanese equities finishing the week notably higher.  
• The week started positively amid hopes for a dovish pivot from the U.S. Federal Reserve. Tuesday saw the largest single-day increase in Japanese shares since March 10, as confident investors sought bargains in beaten-down heavyweights and growth stocks. 
• Despite the week’s strong gains, however, the market finished on a downbeat note, with Japanese equities ending lower on Friday, snapping a four-day winning streak.  
• The yen rallied midweek, briefly strengthening to high JPY 143 levels against the U.S. dollar. 
• Core consumer prices in Tokyo rose 2.8% in September for the year-over-year period, the biggest gain since 2014. However, data released on Friday also showed that Japanese households cut back on spending for a second month in August, as rising living costs weighed on consumers’ budgets. Separate data on Friday also showed that Japanese real wages fell for a fifth straight month in August. The plunge in the yen has lifted consumer prices significantly, outstripping modest pay growth.
• In other economic news, Japan’s services sector climbed into expansion territory in September, the latest survey from Jibun Bank revealed, with a PMI score of 52.2. That was up from 49.5 in August, and above the 50 mark separating expansion from contraction.  
• China’s stock markets were shut for the National Day holiday from October 1 to October 7, otherwise known as Golden Week. The weeklong break followed a risk-off September for Chinese assets as foreign investors sold off Chinese stocks and bonds and pushed the offshore yuan to a record low against the U.S. dollar at month-end. The onshore yuan exchange rate ended September near levels not seen since the 2008 global financial crisis, according to Bloomberg.
• Investors sold USD 1.4 billion in Chinese bonds and USD 700 million in stocks in September, according to the Institute of International Finance, in response to the country’s weakening outlook made worse by Beijing’s zero-tolerance approach to the coronavirus. China reported the highest number of new infections in about a month, driven by people traveling over the holiday, sparking a fresh round of lockdowns in several cities. China’s finance ministry has said it will issue an additional CNY 5.5 billion (USD 773.18 million) worth of yuan-denominated sovereign bonds in Hong Kong on October 12.
• Beijing has stepped up measures to support the country’s debt-laden property sector ahead of China’s Communist Party congress, which is slated to start October 16 and last about one week. Chinese President Xi Jinping is widely assumed to secure an unprecedented third term at the twice-a-decade gathering, which analysts will parse for clues about China’s future leadership and policy direction, including a possible relaxation of the government’s zero-COVID policy.
• In Hong Kong trading, China property stocks rose on reports that mainland financial regulators instructed the largest state-owned banks to extend at least CNY 600 billion (USD 85 billion) of net financing to the embattled property sector in the coming months.
• China’s foreign exchange reserves fell to USD 3.029 trillion at the end of September from USD 3.055 trillion at the end of August. September’s decline marked the third month of losses for China’s foreign exchange reserves, the world’s largest, bringing it closer to the psychologically important USD 3 trillion threshold.

What to watch this week:

• IBD/TIPP Economic Optimism Index (Oct)
• Consumer Inflation Expectations (Sep)
• Producer Price Index (PPI) Inflation (Sep)
• FOMC Meeting Minutes (Sep. 20-21 Meeting)
• Consumer Price Index (CPI) Inflation (Sep)
• Retail Sales (Sep)
• Import & Export Prices (Sep)
• Business Inventories (Aug)

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

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