Weekly Market Update: October 24, 2022
Inflation remains elevated and has shown minimal signs of easing. This was evident in the September reports on producer (wholesale) and consumer prices. Indeed, the Producer and Consumer Price Indexes rose 8.5% and 8.2%, year over year, respectively. The most troubling aspect was that core prices, which exclude the more-volatile food and energy components, remained elevated for both measures. Likewise, the latest consumer sentiment reading from the University of Michigan showed that expectations for inflation over the next year rose to 5.1%, from September’s 12-month low of 4.7%.
The recent decision by the Organization of the Petroleum Exporting Countries (OPEC) and its allies to cut crude oil production will likely add to the global inflation problem. Reducing daily global oil production, especially as the peak winter heating season commences, will probably push oil and gas prices higher. This will make the cost of running a business and maintaining a home more expensive and put additional pressure on business and consumer spending budgets. Consumer purchasing power is shrinking as costs continue to climb.
The latest inflation and jobs data give the Federal Reserve no reason to pause on the monetary policy tightening front. The expectation is that the central bank will hike the benchmark short-term interest rate by 0.75%, to 3.75%-4.00%, at its November Federal Open Market Committee (FOMC) meeting, the fourth-consecutive aggressive increase. The higher lending rates, which recently saw the rate on the average 30-year fixed mortgage jump above 7.00%, are weighing on the housing and homebuilding sectors.
Meanwhile, third-quarter earnings season is going into full swing. This will provide a good reading on how Corporate America is doing and what effect inflation is having on businesses. The reporting season got off to a mixed start, with most of the big banks beating expectations on net interest income gains fueled by higher lending rates. However, those same financial institutions cited mounting economic concerns as they look out to 2023.
Conclusion: In an environment where the central bank is aggressively tightening monetary policy, which slows economic growth, we continue to recommend that investors focus on the stocks of high-quality companies that have the financial wherewithal to weather any potential economic downturn.