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Index Performance
U.S. and International Equities
Markets Finish Higher
Stocks finished higher as Q3 earnings, so far, have come in better-than-feared by market participants. As of today, 20% of S&P 500 companies have reported results with earnings growth tracking roughly in line with prior expectations at just 1.5% year over year (source: FactSet). As of right now, Netflix-driven communication services and healthcare are early winners with the biggest average upside earnings surprises at 10.4% and 6.9%, respectively.
That being said, companies that are more-economically sensitive are seeing challenges amid the inflationary environment. Whirlpool cut its earnings outlook for the year amid softening demand and rising inflation. In addition, Union Pacific lowered its outlook for 2022 volume, even as earnings and revenue came in higher vs. last year.
Fixed Income Mostly Lower
The Bloomberg Aggregate Bond Index finished the week lower as yields increased following continuation of the Fed’s hawkish posturing. High-yield corporate bonds, as tracked by the Bloomberg High Yield index, gained ground for the week, mirroring their equity counterparts.
Yields on 10-year British gilts declined this week given the political and economic challenges in the U.K. The U.K. bond market has been extremely volatile over the past month and we expect continued levels of volatility given the uncertain nature of the political environment and the severe economic headwinds in place.
Commodities Mixed
Natural gas prices declined precipitously this week, as weather expectations for November are warmer than previously anticipated, causing demand for the commodity to be less than expected amid a backdrop of increased supply. Still up on a monthly basis following the OPEC announcement of production cuts two weeks ago, oil did lose marginal ground this week as the Biden Administration announced plans for another Strategic Petroleum Reserve release.
The major metals, gold, silver, and copper, finished higher this week. During its Q3 call to investors, global mining giant Rio Tinto warned of persistent global commodity market softening given heightened downside risks to demand.
Economic Weekly Roundup
U.K. September Inflation
U.K. inflation rose to 10.1% for the month of September, which exceeded market expectations and returned to a 40-year high. Both food and consumer goods increased meaningfully while energy and fuel prices remain elevated. Core inflation, which excludes energy and food, also rose to a record high. Headwinds show little sign of slowing in the U.K.
September Building Permits
After two consecutive monthly declines, building permits rose slightly in September. That being said, housing is still slowing and has more downside to go. Home builders are feeling the impact of slowing demand, as higher borrowing costs weigh on affordability for prospective home buyers. Declining residential investment will place a drag on growth, raising recession risks in the coming quarters.
September Leading Indicators
Last month, the U.S. Conference Board’s Leading Economic Index (LEI) showed worsening economic conditions and have now declined seven out of the last nine months, showing that the economy may not yet have reached a bottom. The decline is predictable as many sectors, such as housing, started slowing months ago. Since the inception of the index, a decline of this magnitude over a six-month period always foreshadowed a recession in the coming quarters.
Business Inventories
September inventories-to-sales ratio for general merchandise stores are significantly higher than 2019. We expect to see additional challenges in inventory management as businesses react to heightened recession risks potentially slow demand as healing global supply chains increase supply. The positive of this scenario is that it could help contain inflation. Tighter financial conditions and slowing global demand see increasing odds of a U.S. recession within 12 months, as supported by the Conference Board data.
Weekly Employment Report
Continuing claims for unemployment insurance for the latest week came in above economists’ expectations, whereas initial claims came in below expectations. Labor market conditions remain tight even though there are some signs of slowing job growth, increasing layoffs, and higher unemployment.
Week Ahead
The following economic data and potentially market-moving events are slated for the week ahead:
Monday: PMI Composite (Oct), Markit PMI Services and Manufacturing (Oct)
Tuesday: Federal Housing Finance Agency Home Price Index (Aug), S&P/Case-Shiller Home Price Index (Aug), consumer confidence (Oct)
Wednesday: Bureau of Economic Analysis Total Light Vehicle Sales (Sep), building permits (Sep), wholesale inventories (Sep), new home sales (Sep)
Thursday: Weekly initial and continuing unemployment claims, Q3 GDP, durable orders (Sep)
Friday: Personal Consumption Expenditures (Sep), personal income (Sep), University of Michigan Sentiment (Oct), pending home sales (Sep), Q3 ECI civilian workers
Next week, 165 companies are expected to report Q3 earnings results
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