Monday and Tuesday began the fourth quarter with a sizable rally, which saw the Dow Jones Industrial Average up nearly 1,600 points over two trading days. Thursday and Friday gave back most of those gains, but the major indexes all ended in positive territory for the week. In fixed income, treasury yields increased and the 2YR/10YR inversion became steeper, which is traditionally seen as a recessionary indicator. Gold was up 2.5% for the week and Oil ended the week up 5.5%.
Monetary policy remained the main driver for market sentiment. Early in the week, Australia’s central bank raised rates less than expected, signaling that not all central bankers remain steadfast on “quantitative tightening.” Corporate and government bond interest rates also stabilized somewhat, and those two news items, together, drove markets higher to start the week.Our ‘good news is bad news’ segment makes a return on labor market data. Thursday saw weekly initial and continuing jobless claims come in slightly above expectations, though still very low. Friday ushered in the release of September employment numbers, showing 263,000 more people gained jobs during the month (higher than expected) and the unemployment rate unexpectedly dropped to 3.5% from 3.7%. This normally great news tanked markets Thursday and Friday, as expectations of the Federal Reserve continuing to hike interest rates rose. There have been more voices calling on the Fed to ease their policy over concerns of creating a worse problem than the one there are trying to solve. In addition, the United States’ hawkish policy is strengthening the Dollar relative to other currencies and creating additional issues for other countries, leading them to also lobby for at least a slow down on rising rates. As of now, markets seem to doubt this will cause the Federal Reserve to blink. The week ahead kicks off third quarter earnings season, with banks such as JP Morgan and Citi reporting, as well as several airlines. In geopolitical events, the war in Ukraine continues with the Crimean bridge linking Crimea and Russia being heavily damaged Saturday. This occurred, perhaps symbolically, on Russian President Vladimir Putin’s 70th birthday and was met with retaliatory missile strikes on Ukraine by Russia. In the UK, the Bank of England (BoE) was forced to restore stability, as yields on Gilts (UK Government Bonds) crashed following plans to ramp up borrowing to fund tax cuts. The crashing price of Gilts led to collateral calls on pension funds who use derivatives for hedging. This caused the BoE to step into the market with Quantitative Easing (QE), where they purchased the oversupply of Gilts to restore stability. The introduction of QE by the BoE while raising interest rates to fight inflation is seen as conflicting interventions. It is important to look to the future, as markets look ahead, for both good and bad signs. Just as we can worry about many things that never come to pass, markets can also be affected by such concerns. While only time will tell how much of what currently unsettles markets will actually happen, Matthew 6:34 reminds us, “Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble of its own.” Our team continues preparing for additional unfavorable news, understanding that not all economic concerns will become reality.
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