- Market Commentary. Risk assets sold off around the globe in late September as investors continued to grapple with hawkish monetary policy positioning from the Federal Reserve and other central banks to battle inflation. Stock markets have retreated to the lows notched in June, and bond rates have climbed to levels not seen in over a decade
- Inflation not Moderating. The latest Consumer Price Index (CPI) report came in warmer than expected, rising 8.3% over the past year. While the official inflation data is proving to be much more resilient, we are seeing signs of normalizing supply-demand imbalances in certain areas. Oil and commodity prices have moved directionally lower, and gas prices at the pump continue to cool. The once red-hot housing market is also seeing a strong deceleration in activity.
- Volatility in Currency Markets. The US dollar soared to a two-decade high as the trifecta of tightening monetary policy, a relatively strong US economy, and safe-haven buying boosted demand for the currency. S&P 500 companies derive roughly half of their revenue and profit from abroad, and the sharp rise in the dollar creates headwinds when translating foreign sales back into domestic currency.
- Fed Remains Focused on Inflation. Following the September meeting, the Federal Open Market Committee (FOMC) raised its policy interest rate by three-quarters of a percentage point to a target of 3% to 3.25%. This is the fifth consecutive rate increase since March, and the fastest rate hiking cycle since the early 1980s. Fed chair Jerome Powell reiterated the central bank’s commitment to restoring price stability by maintaining a restrictive policy stance.
- Health of the Economy. The US economy has slowed from the historically high growth rates of 2021, but we continue to be more constructive than the prevailing consensus on the outlook for the economy, and also for corporate profits. The jobs market remains strong, and there are a record-high number of job openings available for prospective workers. However, growth in consumer spending has slowed somewhat, in part reflecting lower real disposable income and tighter financial conditions. Higher interest rates also appear to be weighing on business fixed investment, and activity in the housing sector has weakened significantly, reflecting higher mortgage rates.
- Market Outlook. Concerns regarding a slowing economy and rising costs have increased. Across the globe, price pressures have strengthened through the course of the year, with a sudden synchronized jump in inflation not seen in decades. The causes vary across countries, but the persistence of global supply chain issues and energy trade disruptions are common threads. The current challenging dynamic is likely to remain in place until there is some notable progress on inflation, which in turn should result in the Fed beginning to lighten up on the tightening cycle. Barring any unforeseen shocks to the system, we do not yet see the scope for a deep or prolonged recessionary environment in the US. The labor market continues to show resilience, and the banking and financial system are structurally sound.
