The Week Ahead – TINA, Meet TARA

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.

Last year, when the Federal Reserve (Fed) gave its forecast on interest rates, they believed inflation would be “transitory,” and they would raise interest rates just three times to get to a range of 0.75% - 1.00% in 2022. As of today, in what can only be described as a complete capitulation, we are on the path for 18 rate hikes, with an expected fed funds rate of 4.50%–4.75%. This of course has had the effect of raising alarm bells that the Fed will overtighten, causing a major recession. Asset prices have experienced severe volatility, making this one of the most difficult market backdrops in history. However, there is a bright side to higher rates. Financial repression, which is the deleterious effect zero interest rate policy has on savers, has officially ended. We have not seen yields at these levels in 14 years, and, finally, investing in bonds makes sense again.

Ever since global central banks embraced a policy of super low interest rates, the clarion call on Wall Street was: There Is No Alternative (TINA) – meaning that at extremely low yields, investors had no choice but to overweight equity allocations. Now that we have attractive interest rates, there is a new acronym gaining popularity: TARA, which stands for There Are Reasonable Alternatives. 

Despite the 10-year Treasury yield surging last week, stocks rallied 4.7%, with half of that increase occurring on Friday as the 2-year US Treasury note yield fell to 4.50% from 4.61%. The strong performance in the stock market was sparked by Friday's Wall Street Journal article titled "Fed Set to Raise Rates by 0.75 Point and Debate Size of Future Hikes.” The Fed appears to be considering downshifting the pace of hikes at the December meeting. Once the blackout period ended one day after the Fed's September meeting, numerous Fed officials depressed investors by repeating the Fed's latest party line: "We are going to raise interest rates until we see the inflation is clearly coming down." San Francisco Fed President & CEO Mary Daly highlighted in an interview on Friday how inflation and unemployment are the two most lagging macro indicators, saying “they lag, they lag, they lag.” That is why she focused on not wanting to overdo it and avoiding an unforced downturn. Bond volatility should decline near term, which would generally support risk assets. 

We estimate third quarter GDP grew a healthy 2.2% after the previous two quarters of slightly negative economic growth. The release on Wednesday will clear up the wild cards to the 3Q GDP release concerning trade and inventory investment. The core inflation print, which is probably the key release this week, should advance less than current estimates. The Case-Shiller and FHFA home price index will show continued weakness and new home sales will continue to show a buyers’ strike. We expect consumer confidence to remain low as the economy continues to slow.

Data Deck for October 24 – October 28: