Inflation Cooling, But Is The Fed’s Work Done?

November 29, 2022

From the desk of Vance Howard:

On a short and intermediate-term basis, the HCM-BuyLine® has turned positive and investors should start to look for opportunities. The longer-term trend is still negative, so caution and prudence are still advised. Biotech, technology, basic materials, and transportation all look to be gaining momentum. (EA) Electronic Arts looks to be on the verge of breaking out of a triangle pattern. (ADM) Archer-Daniels-Midland and (CVX) Chevron are starting to break out of resistance and could have some nice follow through.

The most recent labor market and inflation data support a downshift in Fed rate hikes, and we now expect a 50-basis point rate rise in December. However, the risk of a severe recession still exists as the latest data shows the global economy contracted for a third straight month in October.

After last week’s rally following better than expected news on inflation, we expect reduced volatility and for markets to settle into a range.

Both CPI and core CPI rose less than expected in October
October payrolls were stronger than expected, but wage growth moderated.
This is supportive of a downshift in Fed rate hikes. We expect a 50-basis point rate rise in December.

The S&P Global Flash U.S. Composite PMI fell 1.9 points in November to 46.3, below the break-even level of 50 for the fifth consecutive month, indicating continued weakness in private sector business activity in 2H 2022. Both manufacturing and services activity contracted this month, weighed down by rising interest rates and economic uncertainty.

The Flash Manufacturing PMI dropped 2.8 points to 47.6, below the consensus of 50, and indicating contraction for the first time since June 2020. Output and new orders both fell, with the latter sinking at the quickest rate since May 2020. Delivery times for inputs shortened, reflecting improvement in supplier performance but also weaker demand. As a result, order backlogs fell sharply. Employment growth moderated. Nevertheless, optimism about the output growth outlook over the coming year improved from the prior month, driven by expectations of firmer client demand and shorted input delivery times. Price pressures, both for inputs and output, eased significantly.

The Flash Services PMI fell 1.7 points to 46.1, also below the consensus of 48.0, and in contraction territory for the fifth consecutive month. Service providers pointed to rising interest rates and inflation cutting into disposable income as the main culprits for weaker demand and activity. New orders declined for the second consecutive month and at the fastest rate since May 2020. Backlogs fell, while employment grew only marginally. But optimism about the year-ahead outlook for growth picked up from the prior month. Similar to manufacturing, price pressures in services continued to ease.

Vance Howard

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