Market Commentary 10/14/2022

Inflation Proves Hard To Tame As 10-Year Tops 4% 

A market with no memory is one that can produce a 1,500-point upswing in a day, even when a hotter-than-expected CPI reading was reported (markets are down as I write this on Friday morning).  While a relief rally after a near week of selling was welcomed, big reversals like Thursday’s are symbolic of a bear market. Inflation is a problem and while there are some indications that it has peaked (dry bulk shipping, decline in oil and commodities), inflation is still overwhelming the system. The Fed is set to raise another super-sized .75 bp in November.

We are worried that these massive hikes will strengthen the chances of a financial accident. To date, the hikes have certainly crushed demand for real estate. This defeat is evidenced by the bank’s commentary on origination this morning.  Asset prices will need to adjust to a 7.00% average on 30-year conforming fixed-rate mortgages (although jumbo loans are cheaper).  Both consumer and business debt costs have risen dramatically.  We expect a surge in auto and mortgage delinquencies to follow, as well as an increase in business bankruptcy. 

There is not much to add from the last few weeks commentaries. Rising inflation, combined with the Fed’s expected response to it, continues to manipulate market action. The debt markets are showing signs of stress and banks continue to pull back on lending. A recession is very likely if the US is not already in one. Watching the bond market for clues to where the economy is headed seems logical. Should the 10-year break out above 4%, beware of even more pain.