After a three-week slump, the global stock rebounded last week with the MSCI All Country World Index rising 0.8%. U.S. stocks outperformed following comments from Fed Vice Chair Brainard that acknowledged there are risks associated with overtightening financial conditions. The S&P 500 jumped 2.7% while the NASDAQ surged 4.1%. Overseas, European stocks continued their recent descent – falling another 1.5% - while Japanese stocks squeaked out a 0.1% gain. The 10-year U.S. Treasury yield climbed 12 basis points to 3.31% as investors virtually locked in a 75 basis-point rate hike at the Fed’s September meeting.
American football quarterbacks often use the phrase, “Hut, hut, hike,” to put players on alert that the play is about the start. Likewise, Fed Chair Powell used his Jackson Hole speech on August 26 to tell investors that they should expect more rate hikes. As a result, financial markets are now expecting a terminal fed funds rate of around 4.0% in 2023.
However, investors appear to have been encouraged by Vice Chair Brainard’s recent comments that eventually risks will become more “two-sided.” This is in line with our theory that the Fed’s dual mandates will ultimately become dueling mandates when unemployment starts to rise. We think that any signs of a rollover in the labor market may be the catalyst that finally puts the Fed on hold.
Shawn Snyder
Head of Investment Strategy,
Citi Personal Wealth Management
Last Week's Closeof the main usa
stock market indices
S&P 5004,067
(3.7%index change up
3.7 percent from last week)
DJIAdow jones industrial average32,152
(2.7%index change up
2.7 percent from last week)
NASDAQ12,112
(4.1%index change up
4.1 percent from last week)
Hut, Hut, Hike!
In the U.S., NFL quarterbacks often shout “hut, hut, hike” to signal the start of the offenses’ play. It is rumored that “hut hut” is a version of the “ten hut” command often used in the U.S. military to demand troops’ attention. We don’t know if that’s true, but the directive definitely puts the football players on notice. Fed Chair Powell did the same on August 26 in Jackson Hole, Wyoming, when he caught investors’ attention by saying that there will likely be some economic pain ahead in order to wrangle inflation back to the Fed’s target level. The message was brief and clear: investors should expect more rate hikes.
As a result, bond yields once again shot back up as the market started to price in yet another 75 basis-point rate hike at the Fed’s September 20-21 Federal Open Market Committee (FOMC) meeting. The market also moved up its expectations for the terminal Fed Funds rate to around 4.0% - basically adding another 50 basis points (see figure 1). That also led the 2-year U.S. Treasury yield to surge to over 3.5% (see figure 2).
Figure 1. Implied Overnight Policy Rate (%)
This bar graph shows the Implied Overnight Policy Rate in percent from September 12, 2022 to January 31, 2024.
Sources: Haver Analytics and Citi Global Wealth Investments as of September 9, 2022. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future.
Figure 2. Two-Year U.S. Treasury Yield vs. the Fed Funds Rate (%)
This line chart shows the Two-Year U.S. Treasury Yield vs. the Fed Funds Rate in percent from 2012 to 2022 year-to-date.
Sources: Haver Analytics and Citi Global Wealth Investments as of September 9, 2022.
That said, Powell has not been the lone voice on policy. Last week, Fed Vice Chair Lael Brainard also talked tough and vowed to fight inflation “as long as it takes,” but then followed up by saying that eventually the risk will become more two-sided, acknowledging the risks associated with overtightening.1 The U.S. stock market rallied following Brainard’s comments, as they aligned with our view – which is that the Fed’s dual mandates of price stability and maximum employment will ultimately become dueling mandates.
Traditionally, maximum employment is thought to be the highest level of employment the economy can sustain without generating unwelcome inflation. For the U.S. economy, an unemployment rate between 5% and 6% is often considered the range that is consistent with the non-accelerating inflation rate of unemployment (or NAIRU). With inflation running at 6.3% (according to the personal consumption expenditure deflator) and the unemployment rate at 3.7%, policymakers seem to believe that inflation is too high while unemployment is too low. Powell’s Jackson Hole speech essentially admitted that he is willing to accept some rise in the unemployment rate. If we consider the Chair’s and Vice-Chair’s comments in tandem, it seems to imply that they are intent on raising the Federal Funds rate to around 4.0% (possibly as high as 4.5%) and then intend to hold policy steady while the tighter financial conditions work their way through the economy.
It’s possible this policy approach tilts the U.S. economy into a recession, but it is not yet a given. The Atlanta Fed’s GDPNow tracker is currently showing growth accelerating in the third quarter of 2022 while Citi’s supply chain pressures index suggests that inflation is potentially set to materially decelerate over the next year (see figures 3 and 4). It is going to be a high-wire balancing act for the Fed not to accidentally tip the economy into a recession, but it appears the tightrope walkers haven’t lost their balance just yet. For additional insights, please see our CIO Strategy Bulletin | Identifying Winners and Losers If The Fed Drives a Recession.
Figure 3. Atlanta Fed’s GDPNow Estimate for 3Q22 (%)
This line chart shows the Atlanta Fed’s GDPNow Estimate in percent for 3Q22 from June 2022 to September 2022.
Sources: Bloomberg and Citi Global Wealth Investments as of September 9, 2022. Note: The Atlanta Fed’s GDPNow tracker is estimating the quarter-on-quarter annualized rate.
Figure 4. Citi’s Supply Chain Pressures Index vs. U.S. Consumer Price Index (Inflation)
This line chart shows the Citi’s Supply Chain Pressures Index vs. U.S. Consumer Price Index in Inflation from 2016 to 2023 year-to-date.
Sources: Bloomberg and Citi U.S. Wealth Management as of August 31, 2022. Note: Citi’s Global Supply Chain Pressures Index uses measures of container shipping costs from China to the U.S. West Coast and also from China to Europe. It also uses the Baltic Dry index, which captures the cost of shipping bulk commodities and the Baltic Air Freight index, which captures air transport costs. The final variable is the Brent oil price, as its upsurge in 2021 seems to have contributed meaningfully to rising shipping costs and supply-chain pressures.
What Should U.S. Investors Watch in the Week Ahead?
The August consumer price index (or CPI) report will get most of the attention with headline inflation expected to fall from 8.5% in July to 8.1% in August. Core inflation is projected to rise from 5.9% to 6.1%, which may be reflecting firming shelter costs. Investors will also get fresh readings of the NFIB’s small business confidence index and the University of Michigan’s consumer sentiment index. Given that consumer sentiment is negatively correlated with gasoline prices, it would not be surprising to see the measure improve a bit with national retail gas prices down to $3.75 a gallon and crude oil well below $90 a barrel. President Biden’s student loan forgiveness program might also show up in the data as a one-time confidence uptick.
Figure 5: U.S. Stock Market Returns and
Select Assets
Index
Weekly Chgchange in percent
YTDyear to date change in percent
12 Months12 month change in percent
Div. Yield division yield in percent
Dow Jones
2.7%
-11.5%
-7.8%
2.1%
S&P 500
3.6%
-14.7%
-9.5%
1.6%
NASDAQ
4.1%
-22.6%
-20.6%
0.8%
Instrument
Weekly Chgchange
YTDyear to date
12 Months12 month change
Level
10-Year Treasury Yield (%)
12.4 bps
180.3 bps
201 bps
3.31%
Gold ($/Oz.)
0.3%
-6.1%
-4.3%
$1,717.5
Oil ($/bbl)
-0.1%
12.7%
27.4%
$86.79
❮ Swipe left for more
This table shows returns for various USA equity markets and select assets, in weekly,
year-to-date and 12 month changes.
Figure 6: International Stock Market
Returns
Index
Weekly Chg change in percent
YTD year to date in percent
12 Months12 month change in percent
Div. Yield division yield in percent
Global
0.9%
-18.9%
-17.2%
2.3%
Europe
-1.2%
-24.7%
-24.1%
3.5%
Japan
0.1%
-20.9%
-26.7%
2.4%
Emerging Markets
-1.5%
-20.5%
-24.2%
3.3%
❮ Swipe left for more
This table shows the US Stock Market Returns and Select Assets and International Stock
Market Returns.
Sources: Bloomberg and Citi U.S. Wealth Management as of September 9, 2022. Note 1 (Equities): Global = MSCI All Country World Index (USD); Europe = MSCI Europe (USD); Japan = MSCI Japan (USD); Emerging Markets = MSCI Emerging Markets (USD). The equity index returns shown here are based in U.S. dollars. Returns for a non-U.S.-based investor can differ significantly depending on the effects of foreign currency exchange. Note 2 (Instrument): Gold = U.S. dollars per Troy ounce; Oil = West Texas Intermediate crude at Cushing, OK. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is not indicative of future returns. Real results may vary.
The
Week Ahead
Figure 7: U.S. The Week Ahead
Date
Time
Event
Period
Consensus
Prior
9/13
6:00
NFIBNational Federation of Independent Business Small Business Optimism
AugAugust
90.0
89.9
9/13
8:30
CPIConsumer Price IndexYoYyear on year
AugAugust
8.0%
8.5%
9/13
8:30
CPIConsumer Price Index Ex Food and Energy YoYyear on year
AugAugust
6.1%
5.9%
9/15
8:30
Retail Sales Advance MoMMonth over Month
AugAugust
0.0%
0.0%
9/15
8:30
Retail Sales Ex Auto and Gas
AugAugust
0.8%
0.7%
9/15
9:15
Industrial Production MoMMonth over Month
AugAugust
0.1%
0.6%
9/15
10:00
U of Mich.University of Michigan Sentiment
SepSeptember P
59.8
58.2
This table lists a number of key economic events, analysis reports and forecasts from
influential institutions.
Sources: Bloomberg and Citi Global Wealth Investment as of September 9, 2022. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future. Note: “A” means actual reported figure.
Shawn Snyder
Head of Investment Strategy,
Citi Personal Wealth Management
