November 1, 2022
Catalysts ahead include Tomorrow’s Fed meeting, Friday’s Jobs Report and next Thursday’s CPI print.
US equities are off best levels and mostly lower. Energy is the upside standout for a second day, followed by smaller gains in Utilities, Financials and Materials, while Consumer Discretionary (AMZN), Tech (AAPL) and Communication Services (GOOGL) continue to sell off. Treasury yields are mostly lower with curve flattening as the 3mo/10year curve inverts for the first time during the cycle. The dollar is firmer vs. most currencies, but weaker on the yen cross. Gold is up +0.70%, while WTI crude gains +2.50% on Russia supply concerns.
US equity futures indicated a higher open on unconfirmed social media reports that China was making plans to exit its zero tolerance Covid policy. Extreme oversold conditions and the slightest hint of reopening had mainland markets up +2.5% and Hong Kong up over +5%.
The early morning US rally was interrupted by a JOLTs report that showed ongoing strength in labor markets. September JOLTs job openings came in at 10.717M, which is up 437,000 MoM and well ahead of consensus for a -1.1M decline. Markets prioritize a lagged JOLTs report over a more encouraging October ISM manufacturing Index that prints 50.2 with the prices paid index down 5.1 points MoM to 46.6 vs. consensus for 53.
The Fed wants labor market pressures to ease, with Friday’s October Jobs Report as the most significant near-term catalyst after tomorrow’s Fed policy decision and press conference. The RBA raised rates by 25bp as expected and maintained guidance for a stepdown in its tightening cycle.
The bond market is priced for a 75bp hike tomorrow with a downshift to 50bp in December and a 25bp hike in Q1. Powell will avoid specifics but more likely to signal a slowdown now that all parts of the yield curve are inverted and all real yield tenors are now positive. Bond yields can drift slightly higher on macro data, but it’s becoming increasingly difficult for firmer inflation/labor market data to drive equity multiples meaningfully lower from here. Business fundamentals can worsen and stocks can trade lower, but the days of outright multiple contraction in this cycle are likely behind us. Slightly lower nominal bond yields and the potential for multiple expansion started the +17% mid-summer equity rally. Tomorrow’s Fed meeting, Friday’s Jobs Report and next Thursday’s CPI print all carry the necessary density to move bond yields and equity multiples.