Week of October 17, 2022

Last Thursday’s huge rally certainly did not start out that way.  In the minutes before September consumer price index (CPI) was announced at 5:30am PDT, Dow futures were up more than 300 points.  On the announcement that “headline” CPI had climbed 0.4% month-over-month to 8.2%, Dow futures sank 700 points to being down 400 points at market’s open.  Of greater concern was the 0.6% jump in core CPI (omitting volatile food and energy prices) to 6.6%, the highest reading for core CPI since August 1982.  There was no good news to be found in the inflation report.  But by the end of the trading day Thursday, the Dow had rallied more than 800 points and the NASDAQ more than 400 points.

On the week, the Dow gained 1.5%, while the S&P and NASDAQ dropped 1.5% and 3%, respectively.  For the S&P 500, this was the fourth negative week out of the last five.

“As inflation remains elevated for longer and the Fed hikes further, the risk increases that the cumulative effect of policy tightening pushes the U.S. economy into recession, undermining the outlook for corporate earnings,” Mark Haefele, CIO at UBS Global Wealth Management, said in a note.

Conventional wisdom is calling for the Fed to raise rates by 0.75% when it meets in November and most likely raise rates another 0.75% in December.  Raising interest rates alone (monetary policy) typically is not a particularly effective way of reducing inflation.  It will take a cooperative fiscal policy (i.e., rein in spending) to truly begin to curb inflation now running at a 40-year high.