The Lookout | Week of September 26, 2022

The Lookout | Week of September 26, 2022

Investors will have a lot on their plates this week with US Fed Chair Jerome Powell and European Central Bank President Christine Lagarde set to speak on both Tuesday and Wednesday. Hunter Frey of Catalyst Funds, Rational Funds, and Strategy Shares and Simon Lack of SL Advisors offer their insights on what investors should be watching ahead of several major market events this week.

Major Market Events:

Tuesday, September 27: US CB Consumer Confidence & US New Home Sales

Wednesday, September 28: US Fed Chair Powell Speaks & EUR ECB President Lagarde Speaks

Thursday, September 29: US GDP (QoQ) (Q2) & CAD GDP (MoM) (Jul)

Friday, September 30: EUR CPI (YoY) (Sep) & US Core PCE Price Index (MoM) (Aug)

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

• Markets remain in a steady risk-off trade amid continued hawkish monetary policy domestically and globally, fueling the fears of a global recession.
• Though contrarians may argue that current prices look attractive, it must be taken in perspective to quality (for equities and credit) as additional monetary tightening is likely to continue domestically with the ECB starting to flirt with quantitative tightening if interest rates normalize. Thus, markets remain poised to maintain volatile with a downward bias amid the historical trough experienced in the month of October.
• In short, we see the 10-year Treasury at the higher end of our forecast (3.5%+) with the Fed Funds Rate likely to finish the year well above our forecast resulting in us adjusting our base case to a 4.5% target amid an acceleration of hawkish monetary policy and continued rate hikes as inflation remains stubborn. We maintain our projection that unemployment needs to substantially rise for inflation to recalibrate towards the Fed’s target range. A soft landing is becoming an increasingly less likely outcome with the case for a growth recession our base case.  This week’s initial jobless claims, GDP, and the Fed’s preferred inflation barometer – core PCE — are set to report on Thursday which will likely lead the near-term market trajectory.
• This week remains packed with economic data announcements domestically and internationally as seen below:
  • Tuesday: China industrial profits, U.S. new home sales, Conference Board consumer confidence, durable goods, Fed Chair Powell and Charles Evans speeches
  • Wednesday: Fed’s Mary Daly, Rafael Bostic, Charles Evans and ECB President Lagarde speeches
  • Thursday: Euro zone economic confidence, Euro zone consumer confidence, Germany CPI, U.S. initial jobless claims, GDP, and Fed’s Loretta Metter and Mary Daly speeches
  • Friday: China PMI, Euro zone CPI, Euro zone unemployment and US consumer income, University of Michigan consumer sentiment and speeches from the Fed’s Lael Brainard and John Williams

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

• The 2024-25 area of the futures curve is 0.50% lower than the latest Summary of Economic Projections (SEP). Fed policy can best be described not as managing a dual mandate that balances employment with price stability, but as attending to whichever of these two objectives is most out of line. Consequently, the warnings of hardship to come are likely accurate as the Fed drives up unemployment to soften wage growth and, in turn, inflation.
• Prior to the pandemic, the Fed emphasized full employment and tolerated a modest inflation overshoot. It seems reasonable to assume they’ll swing too far the other way now. Because inflation is the Fed’s focus, it’s likely unemployment will miss to the upside.
• There’s little to fault so far in the current tightening cycle other than its tardiness. But the FOMC exhibits the weakness of committees in that they’re slow to reach a consensus and because of this they’re slow to reach a new one. Crisp decision making is not a hallmark of Powell’s FOMC.