The Week Ahead – Between a Rock and a Hard Place

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

While we do not get the full weight of the seasons here in California, fall is most definitely in the air. We took our two boys to a Halloween event on Sunday evening called the Nights of Jack in Calabasas. It is an artistic light show using jack-o’-lanterns and music to create some amazing visual effects. If you’re looking for a fun family outing, it’s worth checking out. 

Friday marked the end of the third quarter, and while the stock market was down 4.6%, if felt a lot worse. Interestingly enough, the bond index was down slightly worse at 4.8%. Needless to say it has been an extremely challenging environment.

Despite being in a global recession, the US economy is still stronger than the Federal Reserve (Fed) would like – particularly the labor market. This was apparent last week when jobless claims dropped. This of course puts more pressure on the Fed to continue to tighten the screws - further raising interest rates on November 2^nd.

We believe inflation is now in a slowing trend but has yet to show up in the data. Since the Fed is now “data dependent”, it is likely they will continue on their current path of raising rates 0.75% per meeting until inflation data cools, or something in the economy breaks. Here is a list of reasons we expect inflation to come down:

• Strong US dollar
• Commodity prices falling
• Interest rates are much higher
• Dramatically reduced growth in money supply
• Falling consumer demand
• Declining global economic growth
• Slowing rent growth
• Declining car prices
• Shipping rates have rolled over
• Margin compression

This week we get more data on the all-important labor market. As we have seen all year, good news in the labor market is now bad news for risk assets as it gives the Fed more leeway to hike interest rates. This week's labor market indicators include August's JOLTS (Tue.) and both September's ADP Private Payrolls (Wed.) and the BLS Employment Situation (Fri.). Last week’s low jobless claims number suggests that labor demand continues to well exceed supply. Construction spending will be at the forefront on Monday morning, and will likely be a weak print.

Data Deck for October 3 – October 7: