Please find below, an update on markets from Brooks Macdonald, received yesterday afternoon – 10/10/2022
- Equities soared early last week before being given a quick rebuke by central bank speakers
- Last Friday’s employment report showed a strong labour market but declining participation
- Thursday’s CPI release will be vital for the direction of equities and bonds over the coming weeks.
Equities soared early last week before being given a quick rebuke by central bank speakers
This week is expected to start in a quieter fashion after the volatility of last week. The US bond market is closed for Columbus Day, but equity markets remain open. The start of last week saw a rekindling of hope that the Federal Reserve (Fed) may pivot towards a more accommodative stance but by the end of the week central bank speakers convinced the market that it had been too eager to price in a change of policy. Overall equities posted reasonable gains over the course of the week however volatility remains a more consistent theme than direction.
Last Friday’s employment report showed a strong labour market but declining participation
The US employment report on Friday catalysed the latest leg lower for equities with the total number of new jobs coming broadly in line with consensus at 263,000 (255,000 consensus). The August dataset showed the labour force participation rate increase, a sign that employment conditions may have been tempting workers back into the workforce. The reading for September however, saw a reversal of some of those gains with the participation rate declining from 62.4% to 62.3%. News that jobs growth was stronger than expected but labour supply side issues remain was enough to drive equities sharply lower on the day.
Thursday’s CPI release will be vital for the direction of equities and bonds over the coming weeks
This week’s major market event will be the US Consumer Price Index (CPI) release on Thursday. The higher-than-expected US CPI release last month started a broad sell-off amongst equities and bonds. The market is expecting the CPI report for September to show Core (excluding energy and food) CPI to rise by 0.5% month-on-month and for that to lead the year-on-year rate to 6.5% (compared to 6.3% for August). With US energy prices continuing to fall, headline CPI is expected to fall from 8.3% year-on-year to 8.1%.
Relatively few economists are expecting US CPI readings to rise dramatically from current levels, but there is still division as to whether inflation remains sticky, and will therefore plateau at an elevated level, or will begin to fall. Markets latched onto a new narrative around an accommodative Fed at the start of last week with little catalyst, we should therefore expect markets to overinterpret this week’s CPI release and extrapolate any upside or downside reading into the future. It is difficult to overstate the importance of Thursday’s US CPI release to market direction.
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David Purcell
11th October 2022