Markets and Economy
10 things for investors to watch in the fourth quarter
Oil prices, US inflation, stimulus in China and earnings season are among the Top 10 things we’re watching in the fourth quarter.
Last week saw a flurry of central bank activity, including a surprise announcement and some remarks that were more confusing than clarifying.
We got some good news in terms of employment data, but the details indicate that the employment picture isn’t as strong as headlines would suggest.
U.S. Treasury Secretary Janet Yellen warned that the U.S. could run out of money to pay its bills by June 1 if Congress does not raise or suspend the debt limit.
Last week was full of news impacting global markets, from central bank tightening to perhaps deceptively strong employment figures to increasing fears about a breach of the U.S. debt ceiling. Let’s dig in.
Last week saw a flurry of central bank activity, including a surprise announcement and some remarks that were more confusing than clarifying.
In many places around the world, we’ve seen a similar pattern in recent months, and it continued in April: Services activity was strong while manufacturing was tepid.
We got some good news in terms of employment data, but the details indicate that the employment picture isn’t as strong as headlines would suggest.
The U.S. jobs report for April indicated that wage growth edged higher. Average hourly earnings clocked in at 4.4% year over year, up from March’s revised 4.3% pace.10 Average hourly earnings in Canada remained high at 5.2% year over year, although that is an improvement from the 5.3% year over year reading for March.9 In addition, a flash estimate of Euro area inflation for April clocked in at 7.0% year over year, up from 6.9% in March.11 The good news is that core inflation was 7.3% year over year, down from 7.5%.11 These are still very elevated numbers and while each data point might not be moving in the right direction, the general trend is downward.
Some good news came from the New York Fed Survey of Consumers, which showed that one-year ahead inflation expectations moderated in April. Unfortunately, three-year ahead and five-year ahead inflation expects ticked up but, like inflation itself, inflation expectations will be lumpy and imperfect as they follow a general trend downward.12
Following the eruption of the mini-banking crisis earlier this year, credit conditions have tightened and are expected to tighten further. The Fed’s Senior Loan Officer Opinion Survey for April indicated that “Banks expect to tighten standards across all loan categories over the rest of 2023, citing an expected deterioration in credit quality and collateral values, a reduction in risk tolerance, and concerns about bank funding costs, liquidity position, and deposit outflows as reasons.”13
This is clearly becoming a more difficult environment for lending (although the upside is that tightening credit conditions increase the odds the Fed won’t have to go back on its “conditional pause”). We will, of course, follow credit conditions closely going forward.
I have been warning for some time about the potential for the debt ceiling issue to throw a wrench into the economy and markets. Now, markets have become more concerned in recent days. My colleague Brian Levitt pointed out that the rate on the 1-month U.S. Treasury bill has recently surged as investors are less willing to invest in instruments that mature when the debate may be most intense. That should come as no surprise since, last Monday, U.S. Treasury Secretary Janet Yellen warned that the United States could run out of money to pay its bills by June 1 if Congress does not raise or suspend the debt limit. There are many moving parts to this calculation, so we’ll be watching the details closely.
Suffice it to say that the X-date — the date the U.S. will run out of money if the debt ceiling isn’t lifted — could be later than June 1; we will have more colour on that as the IRS assesses tax revenues thus far and makes projections on future revenues. There could also be a short-term extension, which could push the X-date to late summer or fall of 2023.
In the short term, this could cause a credit downgrade like the one we saw in 2011 — that event shook markets, sending risk asset prices down, and increasing demand for “safe haven” asset classes such as Treasury bonds and gold.
And, because the federal government would most likely prioritize the servicing of U.S. debt in the event it reaches the X-date without lifting the debt ceiling, that would mean either a delay or temporary cessation in the payment of line items such as Social Security benefits and military salaries — which could cause substantial damage to the U.S. economy.
I am hoping for the best but planning for worse; my colleagues, public policy experts Andy Blocker and Jennifer Flitton, believe this could be the most contentious debt ceiling fight yet. We can, at least, expect heightened market volatility in the face of uncertainty until the debt ceiling is actually lifted.
And in other news:
Looking ahead, I expect the focus to be on inflation readings in the U.S. — especially the Consumer Price Index — which will be released later this week.
With contributions from Paul Jackson, Brian Levitt, Andy Blocker, and Jennifer Flitton
Source: Reuters, “Australia central bank stuns with 25-bps hike, warns more might be needed,” May 2, 2023
Source: Federal Reserve transcript of Chair Jay Powell’s press conference, May 3, 2023
Source: European Central Bank transcript of Christine Lagarde press conference, May 4, 2023
Source: Institute for Supply Management, May 2023
Source: HCOB Eurozone Manufacturing PMI, May 2, 2023, and HCOB Eurozone Services PMI, May 4, 2023
Source: National Bureau of Statistics, April 30, 2023
Source: Caixin Global, May 4, 2023 and May 5, 2023
Source: South China Morning Post, May 4, 2023
Source: Statistics Canada, May 5, 2023
Source: U.S. Employment Situation Report, May 5, 2023
Source: Eurostat, as of May 2, 2023
Source: New York Fed Survey of Consumer Expectations, as of May 8, 2023
Source: The April 2023 Senior Loan Officer Opinion Survey, May 8, 2023
Source: Bloomberg, as of May 5, 2023
Source: Bloomberg, as of May 5, 2023
10 things for investors to watch in the fourth quarter
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The Federal Open Market Committee (FOMC) is a 12-member committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.
Tightening is a monetary policy used by central banks to normalize balance sheets.
A basis point is one hundredth of a percentage point.
Purchasing Managers’ Indexes are based on monthly surveys of companies worldwide, and gauge business conditions within the manufacturing and services sectors.
The New York Fed’s Survey of Consumer Expectations is a nationally representative, Internet-based survey of a rotating panel of approximately 1,300 household heads.
The Federal Reserve’s Senior Loan Officer Opinion Survey is a survey of up to 80 large domestic banks and 24 U.S. branches and agencies of foreign banks.
The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity. An inverted yield curve is one in which shorter-term bonds have a higher yield than longer-term bonds of the same credit quality. In a normal yield curve, longer-term bonds have a higher yield.
Safe havens are investments that are expected to hold or increase their value in volatile markets.
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