Mid-Market Update: Good Riddance September and Q3, Core inflation heats up, Inflation expectations improved, Oil softens, Gold and Bitcoin rise as yields decline

It is fitting that the S&P 500 index finishes the month and quarter near its lows. Since the middle of August it has mostly been a one-way move lower with the exception of a bounce that came from the hope of a Fed pivot. Earlier selling pressure after the Fed’s preferred gauge came in a little hotter-than-expected did not last after the next round of data showed the economy is weakening. 

The Fed pivot is coming before the end of the year because severe economic weakness is around the corner as aggressive tightening will remain in place. The unemployment rate is expected to pop before year end and by then we shouldn’t be surprised if another risk tilts the Fed’s hand into going neutral.  

Sanctions against Russia was a big theme during the US open and expectations are for more punishment following Moscow’s efforts to annex parts of eastern Ukraine. 

US Data

There were two waves of US economic data, the first suggested inflation remains hot and more Fed tightening pain is justified, while the second wave showed a weakening economy and some relief with inflation expectations.  The Fed’s preferred inflation gauge rose more than expected and personal spending bounced back more than expected. Both core inflation readings came in hotter-than-expected, with a 4.9% increase from a year ago and 0.6% on a monthly basis. Headline inflation was also hot and that surprised some given the drop with gas prices.  Personal income maintained the 0.3% pace that was seen in July, while spending bounced back. 

The economic data released after the open told a completely different story.  The Chicago PMI reading collapsed in September to the worst level in over two years. Other indicators suggest the Chicago reading will bounce back next month.

The final University of Michigan sentiment report showed the headline was revised lower, but more importantly long-term inflation views improved.  The 5–10-year inflation outlook fell from 2.8% to 2.7%, which shows views are falling and now near the levels seen in the summer of 2020. 

Oil

It has been over two years since oil posted a quarterly loss, but a miserable quarter filled with a doom and gloom global economic outlook meant crude’s losses were going to be severe.  The crude demand outlook is not getting any favors from economic data or corporate reports.  OPEC+ will have an easy job next week, but oil prices won’t catch a bid until energy traders are confident an aggressive reduction of output at around 1 million bpd will be delivered.  Brent crude is poised to consolidate below the $90 level. 

Oil will get tighter in the winter and now that most of the crude demand destruction has been priced in, prices should stabilize going into the year-end. 

Gold

Gold prices are rallying as Treasury yields continue to drop.  Inflation expectations matter and Wall Street is confident that we are close to seeing the peak Fed tightening.  Things are starting to look better for gold.  China’s outlook is improving as support for the housing market is happening and they might be closer to delivering a gradual change to their zero-COVID policy. 

If short-end rates continue to drop, gold’s rebound could make a run towards the $1700 level. 

Bitcoin

A terrible week, month, and quarter for stocks was not exactly mirrored by Bitcoin. Yields are retreating and that is starting to provide some relief for crypto.  Bitcoin’s hodlers remain unfazed and if Wall Street avoids any major de-risking moments, the world’s largest crypto could continue to stabilize here. 

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