The Asset Guidance Group Monday Outlook for the Week Ahead Starting September 26, 2022

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

The Week Ahead

The past two weeks have laid bare the brutal realities of rising rates, stubbornly high
inflation, and a slowing economy. Investors are left to wonder when and where the pain
will stop, as the S&P500 is on the verge of making new lows after recovering more than
half its losses from earlier in the year, which would be a historic first occurrence. Although
the economic calendar lacks the punch of recent weeks, there is plenty to keep an eye on
in this elevated volatility environment. The Fed’s quiet period has ended, so there will
be numerous appearances by FOMC members to scrutinize. Will they pour gasoline on the
hawkish fire, or attempt to quell some of the negativity? The headline U.S. event will be the
Core PCE Price Index on Friday, which has been declining since the 5.3% peak in February
but is expected to tick back up from July’s 4.6% reading. Other U.S. releases include
consumer confidence, durable goods orders, new and pending homes sales, personal
spending figures, and trade updates. Overseas, the EU will issue its CPI flash estimate
for September, anticipated to jump to another record high. Germany also publishes CPI
data along with business and consumer confidence. Finally, China’s PMIs are expected
to fall for a fourth straight month as lockdowns continue to plague multiple cities. [1]

U.S. Economic News:

The number of Americans filing for first-time unemployment benefits edged up last week, but overall the labor market remains strong with few layoffs.  The Labor Department reported initial jobless claims last week rose by 5,000 to 213,000.  Economists had forecast new claims to total 214,000.  Part of the central bank’s goal in its fight against inflation is to cool off a red-hot labor market in which wages are rising sharply and adding to inflation.  If the Fed succeeds, hiring is expected to slow, layoffs will rise and the unemployment rate would increase from its current 3.7% rate.

The National Association of Home Builders (NAHB) says the recession in housing “shows no signs of abating”, according to its latest report.  The NAHB’s monthly confidence index fell 3 points to 46 in September.  It was the index’s ninth consecutive month of declines, and excluding the pandemic, its lowest reading since May of 2014.  The index stood at 76 the same time last year.  In the details, all 3 sub-indexes that make up the headline index fell.  The gauge that marks current sales conditions fell by 3 points, while the component that measures buyer traffic fell 1 point.  The gauge that assesses sales expectations for the next 6 months fell by 1 point, as well.  All four NAHB regions posted drops in builder confidence.  Declines were led by the West, which saw a 10-point drop, followed by the South, with a 7-point drop.  The Northeast and the Midwest each saw a 5-point drop.  “Builder sentiment has declined every month in 2022, and the housing recession shows no signs of abating,” said Robert Dietz, the NAHB’s chief economist.

Sales of existing homes fell for a seventh consecutive month in August, according to the National Association of Realtors (NAR).  The NAR reported existing-home sales fell -0.4% to a seasonally-adjusted annual rate of 4.8 million in August.  The reading exceeded forecasts for a slightly steeper decline to 4.68 million.  This is the lowest level of existing home sales since May 2020, shortly after the pandemic began.  Excluding the recession, the level of sales activity was its lowest since November 2015.  Compared with the same time last year, home sales were down -19.9%.  The slowing sales activity is bringing prices down.  The median price for an existing home fell to $389,500, down from a peak of $413,800 reached in June.  Expressed in terms of the months-supply metric, there was a 3.2-month supply of homes for sale in August, up from 2.6 months in August.  A six month supply of homes is generally considered a ‘balanced’ housing market.

Construction on new U.S. housing rose in August, the government reported, but activity was primarily focused on multi-family dwellings such as apartments and condominiums.  The Commerce Department reported home construction rose a seasonally-adjusted 12.2% in August to 1.58 million units.  The rise reversed a steep fall in July, where housing starts fell a revised -10.9%.  Economists had expected starts to rise to 1.5 million.  In the details, apartment construction rose 28.6%, while the construction pace of single-family homes rose just 3.4%.  Furthermore, home ownership affordability is at its lowest level since the Atlanta Fed began monitoring the data in 2006.  The median sales price for a new home was $439,400 in July, according to the U.S. Census Bureau.  In addition, in a foreboding sign of future building activity, permits fell by 10% signaling a drop in future projects. 

The Federal Reserve announced this week it was willing to tolerate a recession in order to restore ‘price stability’.  The Federal Reserve voted to raise its benchmark interest rate by 0.75%—its third unusually large rate-hike in a row.  According to the Fed’s forecast, the unemployment rate will rise to 4.4% next year.  That’s 0.7% higher than the current unemployment rate.  Powell said that “no one knows whether this process will lead to a recession, or, if so, how significant that recession would be,” he said.  While the Fed raised its “terminal rate,” to 4.6% in 2023, no Fed officials forecast that rates would top 5%.  In regard to housing prices, Powell said the recent deceleration in home prices from the “red-hot” market was a “good thing” because it brings prices more closely in line with rents and other fundamentals.  Powell pledged to continue working to rein in inflation “until the job was done”.

U.S. companies reported business activity rebounded in September largely due to a pickup in new customer orders, but high inflation and continued supply and labor shortages posed obstacles to future growth.  S&P Global reported its preliminary “flash” survey of U.S. manufacturing companies edged up 0.3 point to 51.8 this month, while its survey of services companies climbed 5.5 points to 49.2.  It was the first increase in the services index in six months.  New orders, a sign of future sales, rebounded in September for both manufacturers and service-oriented companies such as retailers.  Chris Williamson, chief business economist at S&P Global Market Intelligence stated, “The surveys continue to paint a broad picture of an economy struggling in a stagflationary environment.” [2]

Random Thought/Image of the Week

In a widely-anticipated move, the Federal Reserve hiked interest rates 75 basis points this week.  Despite the move being widely expected, financial markets plunged the remainder of the week.  So what was the catalyst?  Analysts point to the Federal Reserve’s “dot plot”—a graph of the projections of each member of the Federal Open Market Committee (FOMC) of their most likely outcome for GDP, the unemployment rate, and inflation.  Comments from Fed Chair Jerome Powell and the “dot plot” showed the Fed is expected to raise rates at least 125 basis points in its two remaining meetings this year, and the dot plot showed no rate cuts were anticipated until at least 2024.  Bill Zox, portfolio manager at Brandywine Global, in reference to the size of the rate hikes stated, “The Fed is not anywhere close to a pause or a pivot.  They are laser-focused on breaking inflation.  A key question is: what else might they break?” (Chart from the Federal Reserve).

Structured Note Values

  1. XLE/XOP Lowest, XLE Pricing Value 3/25/22: 78.75, Current: 70.48, Delta -10.50%; XOP Pricing Value 3/25/22: 138.60, Current Value: 118.61, Delta -14.42%
  2. Lower of GDX/GDXJ; GDX Pricing Value: 4/29/22: 34.99, Current: 22.44; Delta -35.87%; GDXJ Pricing Value 4/29/22: 42.95, Current: 27.01 Delta -37.11%
  3. Lower of GDX/GDXJ; GDX Pricing Value: 5/26/22: 32.39, Current: 22.44 Delta -30.72%; GDXJ Pricing Value 5/26/22: 39.67, Current: 27.01, Delta -31.91%
  4. ARKK Pricing Value 6/15/22: 39.42, Called 90-Days at 100%
  5. ARKK Pricing Value 7/15/22: 44.11, Current: 37.83, Delta -14.24%
  6. SPX Pricing Value 7/18/22: 3863.16, Current 3693.23, Delta-4.40%
  7. RTY Pricing Value 7/18/22: 1744.37, Current: 1680.09, Delta -3.68%
  8. NDX Pricing Value 7/18/22: 11,452.42, Current: 10,867.93, Delta -5.10% [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. [3]

Chart of the Week: 2-Yr Bond Prices Tumble

The U.S. Dollar Index ($DXY) rose nearly 3% last week after another oversized rate hike and continued hawkish Fed. The inverse head and shoulders technical pattern
that developed in late 2020 and early 2021 broke out one year ago, and it’s been nearly straight up ever since with a 20% rise. This is a staggering move for any currency and has sent the euro, pound, and yen to multi-decade lows. The  index is nearing levels not seen since 2002 when it peaked near $120. Another impressive feat is the weekly RSI, which hasn’t dropped below 50 since the breakout. A move below the upsloping support line could be an initial sign of weakness but without a Fed pivot seems far off. Click on the Chart to Enlarge. [4]

Sources: [2] 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; [2] Chart from the Federal Reserve; [1], [3] [4] tdainstitutional.com

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

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