Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA Securities U.S. quantitative strategist Savita Subramanian sees good news and bad news in the weaker than expected inflation data released this week,
“CPI: good news and bad news: October’s CPI print is market positive in that it lowers the real risk-free rate. But if inflation is cooling because of waning demand (especially in goods, which represent 50% of S&P 500 EPS vs. just 20% for the economy), earnings cuts will likely deepen. Expectations for the Fed to slow its pace of hikes is already priced in, and the focus should shift from the Fed to the real economy and earnings ... Avg. lag between Fed cut & market bottom = 11 months: The rates market expects the Fed to pause in 1H23, but not cut until 2H. While the market is cheering that the terminal rate might be lower than expected, prior bear markets ended 11 months after the Fed first cut on average, indicating that the market narrative typically shifts from the Fed to the economy during recessions. Our bull market signposts have yet to capitulate, with 40% triggered (vs. 20% in September), far below the 80% threshold that has marked historical bottoms.”
“BofA: “Avg. lag between Fed cut & market bottom = 11 months”” – (research excerpt) Twitter
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A research report from Lisa Shalett, Morgan Stanley Wealth Management’s chief investment officer, sounded similarly cautionary about chasing the rally,
“There is evidence from survey data, commodities and inventory rebuild that price pressures are falling, but a data-driven Fed is going to be setting policy without confirmation from trends in wages, rents and services inflation, which have been key drivers lately. Slower rate hikes should not be conflated with an end to tightening or a catalytic loosening of financial conditions. Second, monetary policy operates with a big lag. Although new order indexes point to slowing, third quarter GDP was still solid, at a 2.6% annualized rate. The implication is that the impact of an economic slowdown on earnings—when both volumes and pricing power wane—has not yet been absorbed or reflected in forward estimates. While a 2023 recession is not our base case, many indicators suggest it is inevitable, and even our cautious view could be too optimistic.”
“MS Wealth Management: “Slower rate hikes should not be conflated with an end to tightening or a catalytic loosening of financial conditions”” – (research excerpt) Twitter
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Continuing the cautious theme is Scotiabank strategist Hugo Ste-Marie in a Friday update,
“On the equity side, the S&P 500 powered ahead with a 5.5% gain, its strongest daily performance in 2.5 years. With the index easily crushing its 3900 resistance, we would not be surprised to see an extension toward its next major resistance area at 4100 (falling 200-d MA). While Fed funds futures now peg the terminal rate a notch below 5%, the longer it stays there, the more damaging the impacts on growth in 2023. In a nutshell, we would stay cautious for now… Is the [U.S.] dollar peaking? Possibly. If lower-than-expected inflation prints continue, the Fed’s tightening campaign will likely shift into lower gear quickly before hitting peak rate levels”
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Diversion: “Photos of the Week: Tiny Echidna, Seal Rocks, Tube Strike” – The Atlantic
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