The Lookout | Week of October 03, 2022

The Lookout | Week of October 03, 2022

This week will provide some crucial employment data that may shed light on the effects of the Fed’s fight against inflation. To help investors make sense of what’s ahead, Joe Tigay of Equity Armor Investments and Simon Lack of SL Advisors provide insights on what they’ll be watching as the week unfolds.

Major Market Events:

Tuesday, October 4: US JOLTs Job Openings (Aug) & AUD Retail Sales (MoM)

Wednesday, October 5: US Crude Oil Inventories

Thursday, October 6: US Initial Jobless Claims & ECB Account Of Monetary Policy Meeting

Friday, October 7: US Unemployment Rate (Sep) & CAD Employment Change (Sep)

Joe Tigay, Portfolio Manager of an Alternative Equity Fund, Equity Armor Investments, LLC

• Looking out to the week ahead, all eyes will be on Friday’s jobs report. Ahead of the jobs report, the Federal Reserve has firmly and repeatedly set the expectations that interest rates will stay up until inflation subsides and that they will likely stay higher than previously expected. The Fed is now coming to the reality that the only way to get inflation down is to slow the economy down. This is a far cry from their initial view last year that inflation was transitory. Surely if the Fed was so wrong in 2021 about inflation, we can trust them to get it correct and not go too far this time around, right?
• For the rest of the month, attention will start to focus on the midterm election battle. Midterm years are often weak, and the weakest month during these years is September. This year’s September lived up to that billing, even if a capitulation bottom remains elusive. The good news is that October has historically been the best month of the year during midterm years. A bounce is very possible given the extended market conditions, but whether that leads to an end to the bear market remains to be seen.

Simon Lack, Portfolio Manager of an Energy Infrastructure Fund, SL Advisors

• It’s possible that Quantitative Easing distorted the market forecasts that the bond market would otherwise provide. Although the Fed is now letting its holdingsrun off, they still hold over $5.7 trillion in treasury securities and $2.7 trillion in mortgage-backed securities. Return-insensitive investors including from Japan ($1.3 trillion) and China ($1 trillion) keep yields lower than they would be otherwise, reducing the inflation forecast embedded.
• In the UK, newly installed Chancellor of the Exchequer (US equivalent is Treasury Secretary) Kwasi Kwarteng is likely to become the shortest-tenured in history. The UK is showing what happens when US-style fiscal profligacy is attempted without the benefit of being a superpower issuing the world’s reserve currency. An op-ed in the Financial Timesdescribed the borrowing splurge to fund elimination of the top rate of income tax as “Reaganomics without the dollar.”