Plenty to focus on in the week ahead

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Another threat of government shutdowns, the possible impact of rising oil prices, striking workers, and the expectation interest rates will stay higher for longer all took their toll on US stock markets last week. As well as the possibility that US students will be expected to start repaying their loans again, suspended during COVID-19, and the impact this may have on consumer spending, as a result, the S&P  500 fell around 3% on the week. Aside from energy stocks, most sectors felt the impact, as the Vix fear gauge rose sharply. Government debt continues to look like an attractive alternative to equities as the US ten-year treasury yield hovers around 4.5%, and 10-year gilts offer almost 4.25%. The latest global composite flash purchasing manager index came in at 50.1, a further slowdown from 50.2 in August, indicating the line between expansion and contraction is negligible. The recent US jobless claims report suggested that the US employment market remains robust.

This week there is inflation data in the form of the PCE price index for the US, forecasts are for the rate to fall to 3.8%. In addition, investors will closely monitor August’s durable goods orders, as well as the final readings on second-quarter GDP growth and September’s Michigan consumer sentiment. We also get the latest CPI reports for the eurozone area, where the annual rate is expected to fall to 4.5%.  The United Kingdom will publish the final estimate of second-quarter GDP growth.

The Fed has made it pretty clear they may be close to the peak in the interest rate cycle but have no intention in the short term of changing path. All the above have the possibility to impact growth further. In particular rising oil prices as it is a direct tax on the consumer, and there is little in the way at present to combat the higher prices. Supply is low, demand strong and Joe Biden’s energy policies and not replenishing the strategic reserve at lower prices mean the risk is the price could go higher.

Until the past year, ever since the financial crisis the Fed stepped in quickly at any sign of slowing growth, and the term “Fed put” was coined. Jerome Powell even stated the Fed was prepared to let inflation run a little “hot” above the 2% target to support growth. Those days feel long gone. Estimates for US GDP in the third quarter are being lowered, the question is what would make the Fed change interest rate rhetoric? A sudden jump in the unemployment rate, a larger-than-expected drop in the annual inflation rate or signs the economy is slowing faster than forecast. Any one of those is possible, I remain of the view having started the year too optimistic on the path of US interest rates, we will start this year too pessimistic.