by Bryan Perry

November 1, 2022

Against a wave of disappointing earnings and guidance by America’s biggest and best technology firms, the bulls led a ferocious charge higher last week as traders and investors are betting on a kinder and gentler Fed to emerge from this week’s FOMC meeting. Betting against a Fed pivot has not worked out to date, but the bulls see conditions now materializing for the Fed to soften their hawkish stance.

From the economic data that has crossed the tape of late, it seems a stretch to think that the Fed is near being done with the front-end loading of rate-hiking and continuing QT. Just in the past three weeks, data from Non-Farm Payrolls, CPI, PPI, Consumer Sentiment, Industrial Production, Building Permits, New Home Sales, Q3 GDP, Personal Income, Personal Spending, and Core PCE all came in above forecast. (On the other end of the scales, Mortgage Applications and Pending Home Sales came in below forecast.)

The key takeaway from the PCE report is that with continued income growth and a slightly hotter-than-expected Core PCE price gain, the Fed has an argument to maintain its aggressive rate hike course.

PCE Price Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Instead of penalizing the market further for what looks to be more of the same old embedded inflationary pressures, the market elected to stick with the “bad news is good news” narrative – that a few pockets of weakness in the economy, namely the housing market, are drawing cash off the sidelines, afraid to miss out on any further upside. “The market is starting to believe that there is an endgame in sight for this huge global tightening cycle,” said Keith Lerner, co-chief investment officer at Truist Advisory Services.

The Fed has now pricked the housing balloon, and now seemingly has its sights set on the labor markets. It is hard to imagine that just six months ago, employers were paying big signing bonuses for new hires. But to think that widespread layoffs are going to mushroom does not seem realistic when seasonal hiring for the holiday shopping season is about to get into full swing. After traveling extensively over the past month, I’ve seen airports, hotels, restaurants, and entertainment venues totally packed. Others see the same. This anecdotal evidence points to strong discretionary spending, thanks to a robust job market.

On October 7, the Bureau of Labor Statistics reported: “The US economy added 263K jobs in September of 2022, the least since April of 2021 but above market forecasts of 250K. Notable job gains occurred in leisure and hospitality (83K), health care (60K), professional and business services (46K), and manufacturing (22K). The reading marks a drop from an average of 439K in the first eight months of the year, as higher interest rates and prices started to weigh on the economy. Still, the number continues to point to a tight labor market with employment about 500K higher than its pre-pandemic level.”

Here’s a table showing those 263,000 September jobs in context, continuing a long, slower hiring trend:

Monthly Job Hiring Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Juicing the market further was some selling in bonds that I think was more of a function of deepening recessionary pressures around the globe. Europe is arguably in a recession, with the ECB raising its key short-term rate by 75 basis points last week to 1.5% in response to consumer prices soaring by 9.9% in September. Like the Fed, the ECB is very late in responding to an inflation attack that has proven worse and more persistent than the central bankers expected. (Where have we heard that story before?)

Even more surprising, if this pivot narrative were truly taking hold, the 2/10 Treasury spread would not have widened last week, implying a slower economic growth rate in the first half of 2023. After the gap narrowed to 26 basis points, the spread jumped back up to 40 on Friday – and the market didn’t flinch.

2/10 Treasury Spread Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This past Sunday, Bloomberg reported that Goldman Sachs sees Fed rates peaking at 5% in March 2023 in what seems to be an acknowledgement of the ongoing and stubborn inflation fight the Fed has on its hands. The three 75 basis points hikes, with a fourth coming this week, haven’t had the impact they had hoped for. Within the PCE report for September, shelter, spending, wages, and salaries all proved sticky.

Some notable highlights in the report:

  • Real personal spending was unchanged month-over-month and up 1.9% year-over-year.
  • Wages and salaries were up 0.6% month-over-month, following a 0.3% increase in August.
  • Rental income was up 0.2% month-over-month after increasing 0.2% in August.


In trying to read between the lines as to why aggressive rate hikes have yet to rein in inflation and throttle back growth, the idea of an aircraft carrier taking five miles to come to a complete stop after the engines have been turned off comes to mind. Based on companies reporting sales and profits so far, the economy held up well in the third quarter as it started to adjust to rising interest rates. The fact that GDP advanced 2.6% after two negative quarters tells us that the Fed is likely to remain hawkish in this week’s statement.

Gross Domestic Product Growth Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Even with what looks like clear writing on the wall for further rate hikes, the market sees the rate cycle ending in the next six months, with the economy adjusting to 4%-5% inflation. Plus, they see the stock rally broadening out and new leadership taking hold. This might be why very few analysts have been able to fully explain the late October rally and why a bottom might just be in.

The bond market and the rate of inflation are looking to meet in the middle, and history shows that stocks can outperform in a 4% inflationary world. If I had to paint a landscape, that is what it would look like.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Bonds Still Hold the Keys to the Rebound

Sector Spotlight by Jason Bodner
How Do We Value Beaten-Down Stocks?

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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