The Asset Guidance Group Monday Outlook for the Week Ahead Starting October 31, 2022

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

A busy week looms with the FOMC and Bank of England set to raise rates and the U.S. jobs report due on Friday. A fourth straight 75bps lift from the Fed is priced in, but investors will be watching for how Chair Powell might try to lay the ground for a change in pace going forward. The strong labor market is still expected to show growth of 200K despite the central bank’s tight policy, while the JOLTS and
ADP reports will provide additional color. ISM PMIs will be released on Tuesday and Thursday, after last week’s flash data revealed elevated recession risks.
Other U.S. events include non-farm productivity and factory orders, along with Chicago PMI. Earnings season is winding down, but a handful of key releases will likely confirm slowing economic conditions. Overseas, the  pound and gilt markets have calmed down after Rishi Sunak took over as UK prime minister, and the BOE is expected to raise rates by 75bps on Thursday. In Europe, the week kicks off with October’s inflation numbers and the first look at Q3 GDP, followed by final PMI updates. In the Asia-Pacific region, Australia’s central bank is anticipated to take a cautious approach with a 25bps hike, given concerns about the rapid slowdown in China, their largest trading partner. [1]

International:

It was a similar story with major western international benchmarks.  Canada’s TSX rose 3.2%, while the United Kingdom’s FTSE 100 added 1.1%.  On Europe’s mainland, France’s CAC 40 and Germany’s DAX finished up for a fourth consecutive week.  France’s CAC 40 rose 3.9%, while Germany’s DAX added 4%.  In Asia, China’s Shanghai Composite shed -4.0%, while Japan’s Nikkei ended up 0.8%.  As grouped by Morgan Stanley Capital International, developed markets rose 3.2%, while emerging markets finished down -2.8%.

Commodities: 

Precious metals finished the week mixed with Gold retreating -0.7% to $1644.80 per ounce, while Silver rose 0.4% to $19.15.  Oil rebounded following two weeks of declines.  West Texas Intermediate crude oil rose 3.4% to $87.90 per barrel, while Brent crude added 2.4% to $95.77.  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 -1.3%.

U.S. Economic News:  The number of Americans filing for first-time unemployment claims ticked up last week, but remained near historically low levels.  The Labor Department reported initial jobless claims rose by 3,000 to 217,000 in the week ended October 22.  Economists had expected claims to rise by 6,000.  Analysts note that initial jobless claims is one of the earliest and best barometers of whether the economy is getting better, or worse.  Meanwhile, continuing claims, which counts the number of Americans filing for first-time unemployment benefits, rose by 55,000 to 1.44 million.  Rubeela Farooqi, chief U.S. economist for High Frequency Economics, wrote in a note, “Even as filings are not rising, we expect a gradual increase over coming months as demand slows in response to aggressive and ongoing Fed tightening.”

Home prices cooled at a record pace in August, according to S&P Case-Shiller, with the biggest declines on the West Coast.  S&P CoreLogic reported its Case-Shiller 20-city home price index fell 1.3% in August.  Year-over-year price appreciation rose to 13.1%–but that’s down from 16% in July.  The annual increases in home prices have slowed sharply since hitting a peak of 21.2% in April.  The West Coast, which includes some of the costliest housing markets, saw the largest monthly declines, with San Francisco (-4.3%), Seattle (-3.9%) and San Diego (-2.8%) falling the most.  The broader national index fell a seasonally-adjusted 1.1% in August from July.  The growth rate in housing prices peaked in the spring and has been declining ever since.  Buyers are scarce now that mortgage rates are above 7% and inflation remains high.  Nancy Vanden Houten, U.S. economist at Oxford Economics stated, “We expect the decline in home price growth to accelerate as sharply higher mortgage rates deliver a major blow to affordability and home sales.”

Sales of new homes fell in September, partially reversing August’s big gain, according to government statistics.  The Commerce Department reported new home sales fell 10.9% to a seasonally-adjusted annual rate of 603,000.  Analysts had expected new home sales to come in at 593,000.  Compared to the same time last year, new home sales are down by 17.6%.  The median price of a new home sold in September rose to $470,600 from $436,800 in August.  Still, prices are down from the record high set at $479,800 in July.  Regionally, the decline in new home sales was led by the South, where sales fell 20.2%, followed by the West.  Stephen Stanley, chief economist at Amherst Pierpont is not expecting the housing market to improve anytime soon.  Stanley wrote in a note to clients, “I’m prepared to bet that new home sales have yet to hit bottom, as mortgage rates continue to climb, hitting 7% this week.” 

The economy grew in the third quarter, rebounding from two consecutive quarters of declines in the first half of the year, the government reported.  The Bureau of Economic Analysis reported third quarter Gross Domestic Product—the official scorecard of the U.S. economy, grew at an annual rate of 2.6%.  The positive reading was driven largely by a shrinking trade deficit that masked emerging weak spots in the economy.  The main engine of the U.S. economy, consumer spending, has remained relatively stable this year.  GDP had contracted by 1.6% in the first quarter and 0.6% in the second.  The result exceeded economists’ forecasts of a 2.3% increase.  However, analysts don’t expect the positive trend to continue.  Early estimates of the fourth quarter suggest GDP could decline and many economists and business leaders predict a recession by early next year.  Chief economist Jeffrey Roach of LPL Financial wrote in a note, “the U.S. is not currently in recession, given the strength of the consumer sector, but the trajectory for growth looks weak.  A deteriorating housing market and nagging inflation along with an aggressive Federal Reserve puts the economy on unsure footing for 2023.”

Preliminary, or “flash”, PMI data from S&P Global showed an economic downturn in the U.S. “gathering significant momentum” in October.  S&P reported the U.S. manufacturing sector ticked up slightly to 50.7 in October based on its flash survey.  However, its measure of the much larger ‘services’ side of the U.S. economy (approximately 70% of GDP) fell to 46.6 from 49.3.  Readings above 50 signify expansion, below that, contraction.  The readings were a wide miss from economists’ forecasts.  Manufacturing was expected to rise to 51.8 and Services to rise to 49.7.  In the service sector, the downturn was fueled by the rising cost of living and tightening financial conditions.  In manufacturing, new orders fell back into contraction territory.  Chris Williamson, chief business economist at S&P Global Market Intelligence stated, “The US economic downturn gathered significant momentum in October, while confidence in the outlook also deteriorated sharply.”

Orders for goods expected to last at least three years, so-called ‘durable goods’, rose in September, but analysts pointed out that momentum is fading.  The Commerce Department reported orders at U.S. factories rose 0.4% last month.  It was the sixth increase in the last seven months.  However, the reading missed expectations of a 0.7% increase.  Core orders, which removes the often-volatile transportation and military equipment categories, actually fell -0.7%.  It was the first drop in core orders since February and the biggest since March 2021.  Ian Shepherdson, chief economist at Pantheon Macroeconomics stated, “It now looks increasingly likely that manufacturing will slip into recession in the months ahead.  The sector has outperformed the survey data for much of this year, but that gap is now narrowing as two of its biggest supports—rising auto output and resilient capex—are fading fast.”

The confidence of the nation’s consumers fell to a three-month low in October on fears of high inflation and the rising odds of a recession.  The Conference Board reported its survey of consumer confidence fell 5.3 points to 102.5 this month.  Economists had expected just a slight pullback to 106.3.  In the details of the report, the measure of how consumers feel about the economy “right now” dropped to 138.9 from 150.2, while a similar measure that looks ahead six months slid to 78.1 from 79.5.  Lynn Franco, senior director of economic indicators at the board stated, “The expectations index is still lingering below a reading of 80 — a level associated with recession — suggesting recession risks appear to be rising.”  Corporate economist Robert Frick of Navy Federal Credit Union noted, “Consumer confidence is a proxy for inflation now, particularly prices at the pump.  Confidence improved as gas prices fell in August and September, and now declined as gas prices are rising.” [2]

Random Thought/Image of the Week

If you are more comfortable discussing a Single Malt Scotch or French Bordeaux than some obscure tech stock or cryptocurrency, you are not alone.  Billionaire investing legend Warren Buffet says investors should stick to areas they know when they are deciding what to invest in.  The fine wine benchmark Liv-ex 1000 index has returned over 38% over the last two years, while the S&P 500 has managed just a 7% gain.  And during 2008, when the S&P 500 dropped ‑38%, the Liv-ex 1000 fell less than -1%.  Although the ultra-wealthy have been investing in fine wines and rare spirits for years, average investors have not participated.  Now offerings from vint.co and others are offering “shares” in collections of wine and spirits, making fine wine and spirits investing accessible to average investors.  Cheers!  (Chart from chartr.co) Click Here to View Chart. [3]

Structured Note Values

  1. XLE/XOP Called at 100% Face Value 
  2. Lower of GDX/GDXJ; GDX Pricing Value: 4/29/22: 34.99, Current: 24.72; Delta -29.35%; GDXJ Pricing Value 4/29/22: 42.95, Current: 29.95 Delta -30.27%
  3. Lower of GDX/GDXJ; GDX Pricing Value: 5/26/22: 32.39, Current: 24.72 Delta -23.68%; GDXJ Pricing Value 5/26/22: 39.67, Current: 29.95, Delta -24.50%
  4. ARKK Pricing Value 7/15/22: 44.11, Current: 38.89, Delta -11.83%
  5. SPX Pricing Value 7/18/22: 3863.16, Current 3901.06, Delta +0.98%
  6. RTY Pricing Value 7/18/22: 1744.37, Current: 1852.12, Delta +6.18%
  7. NDX Pricing Value 7/18/22: 11,452.42, Current: 11,102.45, Delta -3.06% [4]

Chart of the Week: 

Last week brought some relief to skyrocketing interest rates. The 30-Year Treasury Index (TYX) broke above important technical resistance at 40 (4.0% yield) two weeks ago, which was also the high print from the prior 10 years. Last week a small retracement dropped the rate from 4.4%
back to 4.1%, which is larger than it sounds. Long-term rates are still above the
important 4.0% mark, so will the new potential support hold, or does the correction continue? Click here to view chart [5]

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] tdainstitutional.com

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

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