The Week in Review 11/14/22

“Logic will get you from A to Z; imagination will get you everywhere.”
–Albert Einstein

Good Morning,

What a week!!! Tremendous volatility… but this time to the upside!

All is not well in the land of crypto as FTX was crushed for facing a liquidity crunch. The week ended with FTX Group stunningly filing for Chapter 11 bankruptcy.
But even the unknown of what happens to crypto and any contagion from it could not stop buyers from the buying stampede!

There was a midterm election on Tuesday, the final results of which are still unknown as of this writing. Reports suggests the GOP will manage to claim a narrow majority in the House, yet some Senate races are still too close to call. In fact, it might take the December 6 runoff election in Georgia to determine if Democrats or Republicans have control of the Senate. With the GOP holding a narrow majority in the House, though, it is evident that the next few years likely won't include any new major spending plans or tax hikes. In other words, there will likely be legislative gridlock for the next few years.

The stock market was filled with trading excitement that produced the best day for the market on Thursday since 2020 and some huge gains for the major indices.

The main catalyst for the excitement was the October CPI report, which came in better than expected and much better than feared.

CPI increased 0.4% month-over-month in October (consensus 0.7%) while core-CPI, which excludes food and energy, increased 0.3% month-over-month (consensus 0.5%). The monthly changes left total CPI up 7.7% year-over-year, versus 8.2% in September, and core CPI up 6.3% year-over-year, versus 6.6% in September.

Investors came away with these takeaways…

1. The report helped validate the peak inflation view.
2. The report is apt to compel the Fed to take a less aggressive rate-hike approach at the December FOMC meeting.
3. Some encouragement was borne out of the understanding that the shelter index (computed with a lag) contributed more than half of the monthly all items increase, suggesting price increases moderated in many other areas.

This welcome inflation news, combined with a huge drop in the dollar and market rates, launched an epic rally. The Nasdaq Composite for its part soared 7.4% on Thursday.

Many of the beaten-up growth stocks made double-digit percentage moves, including Amazon.com, but just about every stock came along for the CPI ride.

Growth stocks, though, were the favored rebound candidates as the 10-yr note yield dove 31 basis points to 3.84%. The 2-yr note yield, which is sensitive to changes in the fed funds rate, plunged 32 basis points to 4.31%.

Those moves were precipitated by changing rate-hike expectations. The fed funds futures market now sees an 83.0% probability of a 50-basis points rate hike at the December FOMC meeting (versus 56.8% before the CPI data) and a terminal rate of 4.75-5.00% by June (versus 5.00-5.25% before the CPI data). 

The dollar got clobbered on those same shifting expectations. The U.S. Dollar Index fell a whopping 4.0% on the week to 106.42. The drop in the dollar took some of the pressure off the multinationals and aided in the belief that downward revisions to 2023 earnings estimates may not be as severe as feared, assuming the weakness persists.

Another factor aiding that belief was a Bloomberg report that China relaxed quarantine guidelines for inbound travelers and is aiming to avoid city-wide testing when COVID transmission chains are clear. This news, which came on Friday, helped boost oil and copper prices.

This also added to the market's newfound enthusiasm for a year-end rally. The S&P 500, which dipped below 3,500 following the disappointing September CPI report in mid-October, peeked its head above 4,000 on Friday and closed just below that level when the final bell for the week rang.

All 11 S&P 500 sectors logged gains last week, none bigger than the information technology sector (+10.0%), which was driven by a huge comeback effort among the semiconductor stocks and by Apple and Microsoft.

For the week, the Philadelphia Semiconductor Index was up 14.9%.

Other standouts included the communication services (+9.2%), materials (+7.7%), real estate (+7.1%), consumer discretionary (+5.9%), and financial (+5.7%) sectors. The weakest performers were the defensive-oriented health care (+1.8%) and utilities (+1.4%) sectors.

Market Snapshot…

• Oil Prices – West Texas Intermediate gained $2.47 to end the day at $88.94/barrel, while Brent crude rose $2.28 cents to $95.95/barrel.
• Gold – Gold prices extended its gain to a near three-month high. Spot gold was 0.06% higher at $1,765.26 per ounce, while U.S. gold futures gained 0.9% to $1,769.60 per ounce. Silver finished the week at $21.667.
• S. Dollar – The dollar index dropped down 1.65% at 106.42.Euro/US$ exchange rate is now 1.034.
• S. Treasury Rates – The yield on the benchmark 10-year Treasury note plunged more than 32 basis points to 3.816%, falling below the psychological 4% level.
• Asian shares were mixed in overnight trading.
• European Markets are trading higher.
• Domestic markets are trading slightly in the red this morning.

This week’s news will be centered around manufacturing, the housing market, and the Producer Price Index (PPI). The PPI is widely considered a leading indicator and could give some inclination on what producers are and are not passing through to their customers and whether October’s positive surprise could be the start of the trend moving forward.

Have a wonderful week!

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