Here’s The Asset Guidance Group Outlook for the Week Ahead… 

The Fed finds itself in a real quandary now. Rising interest rates have failed to stymie the
labor market, while both  shelter and wage inflation  persist. Additionally, the  Atlanta Fed GDPNow model implies that economic growth accelerated in Q3, potentially reversing two straight negative quarters. Without some hard evidence that their actions have influenced anything but the struggling equity markets, the Fed cannot begin to think
about a pivot in its restrictive policy. This week’s focus turns from jobs to the U.S. inflation
data, with the PPI release Wednesday followed by CPI on Thursday. Expectations are for
increases of 0.2% MoM and 8.1% YoY for consumer prices, numbers that would only bolster the central bank’s case. Wednesday will also see the release of the minutes from the last FOMC meeting, and it’s another busy week of  committee member appearances to parse. The U.S. calendar concludes with retail sales and consumer sentiment on Friday, along with the beginning of Q3 earnings season. Many of the large banks will report, and investors will be keen to see how the surging U.S. dollar has impacted corporate profits
and CEO outlooks. The overseas calendar is light, with the UK reporting employment
figures and monthly GDP while the Bank of England’s gilt buying intervention is set to expire at week’s end. In China, stimulus measures have proven to be little help against harsh lockdowns, which will likely keep inflation readings tame and imports data weak. [1]

Commodities:

Commodities were mostly higher for the week.  Precious metals rose: gold rose 2.2% to $1709.30 per ounce, while silver rallied 6.4% to $20.25.  Oil surged on rumors of a Fed pivot and OPEC production cut.  West Texas Intermediate crude jumped 16.5%, while Brent crude gained 15.4%.  The industrial metal copper, viewed by some analysts as a barometer of world economic health due to its wide variety of uses, finished the week down -0.8%. 

U.S. Economic News

The number of Americans filing first-time unemployment benefits jumped by almost 30,000 last week, a sign of rising layoffs as the economy slows and businesses scale back employment.  The Labor Department reported initial jobless claims hit a five-week high of 219,000 last week.  Economists had forecast new claims would total just 203,000.  Of the 53 states and U.S. territories that report jobless claims, 30 showed an increase and 23 recorded a decline.  Meanwhile, the number of people already collecting unemployment, known as ‘continuing claims’, rose by 15,000 to 1.36 million.  That number remains near a 50-year low.

The U.S. added just 263,000 new jobs last month, the smallest gain in over a year and a half, the government reported.  The weaker reading was attributed to shortages of qualified labor and waning demand for workers as the economy slows.  While the reading was strong historically, it was the weakest since April of 2021.  It also fell short of Wall Street forecasts.  Economists had forecast 275,000 new jobs to be created.  In the details, hotels, restaurants and other companies in the hospitality business created 83,000 new jobs, reflecting strong demand for services such as travel and recreation.  Hiring also rose sharply in health care and professional businesses.  Manufacturers also added 22,000 jobs and construction firms hired 19,000 people.  Employment fell slightly in finance, transportation and government.  The unemployment rate dropped from 3.7% to 3.5%–that puts it back at a pre-pandemic low and marks one of the lowest rates since the late 1960’s.  Analysts viewed the unemployment rate report as a big negative for the stock market as they said the report was not weak enough to deter the Fed from continuing to hike interest rates.  Senior economist Sam Bullard of Wells Fargo stated, “There’s no evidence to suggest the Fed should reduce the pace of rate hikes.”

The labor market may finally be cooling as the number of job openings in the U.S. sank to a 13-month low.  The Labor Department reported job openings in the U.S. fell to 10.1 million in August, down 1.1 million from July marking the second-largest monthly drop since records began.  The decline in job openings was the fourth in the last five months, and openings fell below 11 million for the first time since November 2021.  Also in the report, the number of people quitting their jobs rose by 100,000 to 4.16 million—not far from an all-time high.  The ‘quits rate’ is often used by analysts as another barometer of the labor market as its assumed that one would only leave a job in favor of a more lucrative one.  Chief economist Stephen Stanley of Amherst Pierpont Securities wrote in a note that the job-openings report shows signs of a cooling labor market but, “I will want to see another significant monthly decline in job openings before jumping fully on board with the notion of a loosening labor market,” he added.

A key barometer of American factory activity fell to a more than two-year low last month, as high inflation and rapidly rising interest rates weighed on demand.  The Institute for Supply Management (ISM) reported its manufacturing index declined 1.9 points to 50.9 in September.  Economists were expecting a reading of 52.0.  While numbers above 50 signify growth, the index has fallen sharply since earlier in the year.  Rising interest rates and higher prices are an increasing headwind for the economy.  While manufacturers report they are still growing for now, many report that they are adopting hiring freezes in anticipation of demand weakening further.  Timothy Fiore, chairman of the survey stated, “Companies are saying we don’t need as many employees.  That is a clear change compared to where we have been a year or a year and a half ago.”  Economists Oren Klachkin and Kathy Bostjancic at Oxford Economics wrote in a note to clients, “Manufacturing will lose more steam in the months ahead as slackening goods demand and weak business investment depress activity.”

In the vast ‘services’ side of the U.S. economy, ISM stated business conditions dipped in September, but employment remained strong.  ISM’s services index dipped to 56.7 in September but exceeded economists’ forecasts for a reading of 56.  In the details, the new orders index fell 1.2 points to 60.6, while production slipped 1.8 points to 59.1.  However, the employment barometer rose 2.8 points to 53.  Yet some companies reported they would be more cautious about hiring and rely more on temporary labor in case a recession ensues.  Of note, the prices-paid index, a measure of inflation, fell 2.8 points to 68.7.  That marks the fifth straight decline and the lowest level since the start of 2021.  Prices are still high and rising, executives said, but they are not rising as rapidly as they were earlier in the year.  Thomas Simons, economist at Jefferies, wrote in a note to clients, “All the details in this month’s report are encouraging, and they are consistent with our view that the economy was not in a recession in the first half of 2022, nor is it heading into one in the second half.” [2]

Random Thought/Image of the Week

REITs, or Real Estate Investment Trusts, are considered by many to be an essential holding in a well-diversified portfolio.  However, many REITs, especially those specializing in commercial real estate such as office buildings, have been horrifically damaged by the dramatic drop in demand for office space throughout the US.  One of the most widely-held REITs operating in this space is the Vornado Realty Trust (VNO), which has a very heavy presence in the office space markets of New York City, Chicago and San Francisco.  Despite paying a hefty dividend, the stock has fallen dramatically, down about 75% from its all-time high and now trading where it first traded in 1997, 25 years ago.  (Chart from wolfstreet.com). [3]

Structured Note Values

1. XLE/XOP Lowest, XLE Pricing Value 3/25/22: 78.75, Current: 81.80, Delta +3.87%; XOP Pricing Value 3/25/22: 138.60, Current Value: 142.58, Delta +2.87%
2. Lower of GDX/GDXJ; GDX Pricing Value: 4/29/22: 34.99, Current: 24.39; Delta -30.29%; GDXJ Pricing Value 4/29/22: 42.95, Current: 30.03 Delta -30.08%
3. Lower of GDX/GDXJ; GDX Pricing Value: 5/26/22: 32.39, Current: 24.39 Delta -24.70%; GDXJ Pricing Value 5/26/22: 39.67, Current: 30.03, Delta -24.30%
4. ARKK Pricing Value 7/15/22: 44.11, Current: 37.53, Delta -14.92%
5. SPX Pricing Value 7/18/22: 3863.16, Current 3639.66, Delta -5.79%
6. RTY Pricing Value 7/18/22: 1744.37, Current: 1702.15, Delta -2.42%
7. NDX Pricing Value 7/18/22: 11,452.42, Current: 10,652.40, Delta -6.99% [4]

The Week Ahead

While three central bank interest rate decisions await this week, global investors will
focus squarely on Wednesday’s FOMC meeting. Amid last  week’s rumors of a 100bps
hike, traders are pricing in 75bps and indications that further substantial increases
are coming. Yes, annual inflation did decrease from 8.5% to 8.3% last month, but it
remains miles away from the Fed’s intended 2% target.  While supply chain disinflation
is finally emerging, the U.S. labor market is still far too tight to bring demand growth
and thus inflationary pressures down quickly enough. After delaying its decision by a week, the Bank of England is expected to raise by 50bps but may consider more after prime minister Truss announced a supportive package to cap household energy bills. The Bank of Japan may be considering a policy shift after conducting a rate check last week, which is widely interpreted as a potential currency intervention to prop up the sinking yen. But experts see raising the cap on 10-year government bond yields more likely than the BOJ raising short-term rates, as inflation still hovers near just 2.5%. The other main event this week is Friday’s global PMIs, with updates on supply and demand conditions for the manufacturing and services sectors amid recession concerns. Other releases of note include U.S. housing starts and existing home sales, Canada’s August CPI, and EU consumer confidence. [5]

Chart of the Week: 

Crude oil futures (/CL) finally broke out of the downward channel it’s been stuck in
since the June high, pushed by the 2M barrel per day production cut from OPEC. The tide had already started to turn, as the prior week’s low produced a bullish MACD divergence. From there prices
advanced every day last week, breaking above both the 20- and 50- day exponential moving averages (EMAs)
and the channel’s resistance.  Those EMAs turned higher, and crude closed the week right at its 200-day EMA. A further advance this week would likely send the MACD trend positive for the first time since June. Click on the Chart to Enlarge. [6]

Sources: [1] tdainstitutional.com; [2] [3] [4] Asset Guidance Group analysis, www.stockcharts.com; All index- and returns-data from Yahoo Finance; news from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat,0020Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Chart from Bloomberg.com; [5] [6] tdainstitutional.com; 

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