The Lookout | Week of September 19, 2022

The Lookout | Week of September 19, 2022

This week is set to be a busy one for investors with several key market events taking place, including the US Federal Reserve’s decision on interest rates. Hunter Frey of Catalyst Funds, Rational Funds, and Strategy Shares and Joe Tigay of Equity Armor Investments, LLC offer their insights into what investors should be watching.

Major Market Events:

Tuesday, September 20: CAD Core CPIT (MoM) (Aug)

Wednesday, September 21: US Fed Interest Rate Decision & US Crude Oil Inventories

Thursday, September 22:  GBP BoE Interest Rate Decision & US Initial Jobless Claims

Friday, September 23: US Fed Chair Jerome Powell Speaks

Hunter Frey, Investment Analyst, Catalyst Funds, Rational Funds, Strategy Shares

• The Fed’s pivotal meeting this week on the velocity of interest rate hikes remains the most anticipated market mover. With CPI higher than consensus expectations (at 8.3% YoY), a 75 basis point hike seems imminent. However, uncertainty remains as recession jitters may amplify if the Fed decides to implement a shock 100 basis point interest rate increase. We see a 75 basis point hike as a much higher probability.
• Though global growth appears to be slowing with fears starting to be priced into oil futures, consumers remain fairly resilient, with retail sales rising late last week. This supports our base case of a 75 basis point hike, following the Fed’s monetary policy plan while containing the fears of Wall Street.
• Uncertainty remains as geopolitical tensions persists (regarding Russia-Ukraine War, Taiwan, Midterm Elections, etc.), policy trajectory continues to tread water, unemployment increases remains heavily debated (though we think it will rise), and a rising US dollar will continue through the end of the year. The current macro environment’s uncertainties may prolong volatile markets in most traditional asset classes.

Joe Tigay, Portfolio Manager Of An Alternative Equity Fund, Equity Armor Investments, LLC

• With the Federal reserve meeting this week, investor eyes will be on the 2-year treasury yield. Ahead of the Fed meeting, 2-year yields are currently trading at a 15-year high. The Fed can have an enormous impact on this chart.  Following the June Fed meeting, 2-year yields dropped half a point in two weeks. One month after the rate decision, the Nasdaq 100 had rallied 3.2% and SPX 1.92%.
• If rates rise following Wednesday’s Fed meeting, it will be a headwind to equities. And if rates fall, typically, lower yields are a big boost to risky assets. However, this time around the devil is in the details. There are two possible reasons rates may fall. The first is that inflation is under control. The second would be if the economy is getting significantly worse. If somehow the reason is the first option, which I view skeptically, then there is a bullish case for equities.
• We know rates are likely to go up in the short term, but will the Fed and Jerome Powell give any signals to the market where rates will be going once inflation subsides?