Liz Looks at: Surprises

By: Liz Young · October 12, 2023 · Reading Time: 3 minutes

Stress Response

Before last weekend, markets were already under the stress of a recent sell-off, a swift rise in Treasury yields, the anticipation of Q3 earnings season, and upcoming inflation data. Bond markets were closed on Monday for the holiday, seemingly giving us a reprieve from watching each intraday tick. But the world was surprised over the weekend by war breaking out in the Middle East as the conflict between Israel and Hamas escalated, redirecting all of our attention to much more devastating stresses. Events with a humanitarian toll like this make talking about markets seem trivial.

It could be some time before we know the severity, contagion, and related effects that will be caused by the conflict.

The market’s first reaction was in oil prices, which saw an immediate spike of 4% in the wake of the attack. Gold, the safe haven precious metal, rose 2% in Monday’s trading.

Unwelcome Upside

In an environment where we’re hoping for inflation to fall, and after a months-long stretch of oil prices rising, the move up is not welcome. Data for two of the main inflation metrics come out this week — at the time of this writing, the Producer Price Index (PPI) is available, and the ever-important CPI data will soon follow suit.

Although not a headline-grabbing inflation measure, PPI is still important to watch because it measures wholesale prices from the perspective of producers. This month’s data showed higher than expected readings on a number of metrics.

The headline number came in at 2.2% y/y versus 1.6% expected, with the m/m number coming in at 0.5% versus 0.3% expected. Energy costs accounted for more than a third of the increase. Stripping it out makes the “core” metrics look cooler, but the economic reality is everyone has to buy energy in some form, and removing it from calculations is not useful in practice.

Much like other inflation metrics, these numbers are down considerably since the peak last summer, but the recent move back up follows the same trend as in CPI and PCE. We still have work to do before any of these are at a decidedly comfortable level.

Next Up

No rest for the weary. This week marks the start of Q3 earnings season as we will hear from the big banks, a sector we’ve all been following closely since the unwelcome stresses of earlier this year. When the big banks report, their quarterly results are important, but the commentary from management is the critical takeaway. These behemoth financial firms have a lens into business and consumer lending activity that drives our economy. They also have a lens into capital markets that indicate investors’ and businesses’ appetite for risk. All of that on top of the regulations that require them to hold certain buffers of capital to protect from… unwelcome surprises.

This earnings season and the remainder of this year in global markets is likely to be interesting and difficult to navigate. Keep your eyes wide open, emotions in check, objectivity top of mind, and risk management behind the wheel.


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