The Lookout | Week of November 14, 2022
Investors will get a sense of the broader resiliency of inflation this week with several international countries set to release their CPI figures. In the latest edition of The Lookout, Scott Kimple of Warrington Asset Management and Stan Sokolowski of CIFC Investment Management examine the Fed’s continued fight against inflation and what it could mean for international markets.
Major Market Events:
Monday, November 14: JPY GDP (QoQ) (Q3)
Tuesday, November 15: US PPI (MoM) (Oct) & EUR German ZEW Economic Sentiment (Nov)
Wednesday, November 16: GBP CPI (YoY) (Oct) & CAD Core CPI (MoM) (Oct)
Thursday, November 17: EUR CPI (YoY) (Oct) & US Initial Jobless Claims
Friday, November 18: US Existing Home Sales (Oct)
Scott Kimple, Warrington Asset Management, Senior Portfolio Manager of a hedged strategy fund
- Ramifications of the Federal Reserve’s (the “Fed”) relentless rate hike campaign continue to surface in many places throughout the world. The most direct impact is seen in the U.S. Treasury yields, where the 10-year note eclipsed 4% in October (and reached a high of 4.33%). And, while the Euro and British Pound exchange rates have stabilized, the Japanese Yen continued to weaken versus the U.S. dollar.
- It is our belief that the Fed’s strong inflation response will likely have future unintended consequences, and it appears that those effects are beginning to surface. One example is the news that the UK’s pension system was perilously close to insolvency in late September and only government intervention to buy bonds prevented a potentially catastrophic outcome. Scenarios such as this are not surprising and if the Fed continues on this path, as is widely expected, other fissures are certain to reveal themselves.
- Despite these new global cracks appearing, October was the best month for domestic blue-chip stocks since 1976. The S&P and Nasdaq indices also performed well but were hampered by poor earnings results from the mega-cap tech names like Amazon, Microsoft, Meta/Facebook, and Google.
Stan Sokolowski, CIFC Investment Management, Portfolio Manager of a alternative income fund
- Global markets flew high in October on hopes that policy makers were finally changing course and a slowdown to the historically large rate hikes was in sight. A positive bounce back in U.S. GDP, which returned to growth in Q3, also helped to momentarily quell recession worries. Corporate earnings were better than had been expected, slowing in line with the weakening economic environment but often surprising to the upside.
- However, we do not expect October’s extreme strength to persist as broad-based, sticky inflation, a hawkish Fed, slowing growth, continued rate hikes and challenging liquidity conditions continue to pose risks to price levels in the near term. Overall, risks remain high with a heavy November calendar of events ripe for surprises, including a G20 summit and numerous central bank meetings that will keep investors on their toes.