U.S. Equity Markets finished Friday higher after a quiet end to the week, led by the 0.59% gain in the Dow. Markets finished higher following a late rally, albeit it was an uneventful Friday. No major economic highlights were reported. Fedspeak was rather calm as well with the only notable news coming from Collins who said services inflation is still too high. Existing Home Sales fell for a ninth straight month in October. This week is a holiday shortened week, with only a few economic indicators coming on Wednesday and the end of the earnings season. FOMC minutes will also be released on Wednesday. The American economy is deteriorating rapidly. We know this because households are sacrificing future stability – through the use of their savings and credit – to cope with high inflation. Since late 2021, the Federal Reserve has told us it is worried about inflation growth. After all, the U.S. Bureau of Labour Statistics’ Consumer Price Index has risen from a low of 0.1% year-over-year growth in May 2020 to a 7.7% increase this past October. As a result, the Fed is trying to stabilise prices by strengthening the Dollar. Over the past year, the Federal-Funds Rate target has jumped from a range of 0% to 0.25% to a new range of 3.75% to 4% – a much faster pace than previous rate-hike cycles. Last Thursday, St. Louis Fed President James Bullard said that rates need to keep rising. He said they need to reach a minimum target range of 5.00% to 5.25% – which means that the fastest rate-tightening cycle still has runway left. But, considering interest rates are already around 4%, that means we only have between 1% to 1.25% left to go. In other words, the central bank’s rate-hike cycle may be nearing its end. This would support a steady long-term rally in the S&P 500 Index. As I have said before, the Fed is determined to crush rising inflation by killing economic growth. In the process, it is going to squash American households. While families have weathered high inflation for much of the year, signs are now clearly showing that consumers are losing ground against the rising cost of living. You see, over the past couple of years, most Americans have been buoyed by the financial security of government handouts, such as stimulus payments, loan forbearance, and tax credits, among others. This led to a high pandemic-era savings rate. But all that financial security is drying up. The trillions of dollars saved by Americans while they were stuck at home are fading fast. Last week, the government reported that Retail Sales rose 1.3% from September to October. Many outlets touted this as a sign that consumers are not doing all that bad. However, new data shows that Americans are making major sacrifices to maintain their current level of daily living expenses – meaning they are spending more on items they need instead of things they want. On Tuesday, the Federal Reserve said that households increased debt during the third quarter at the fastest pace in 15 years. In other words, Americans are increasing their use of credit to stay afloat. And one-way households are surviving is by reducing future savings. According to a new survey by Wells Fargo, one in four retail investors is putting less earned income into stock market investments so they can cover living expenses. Sentiment is so low that 42% of adults would choose to cash out their investments. Plus, nearly a third would withdraw funds from retirement accounts if there were no penalties, just so they could feel better about their current financial situation. Even worse, Americans are turning to credit cards to bridge the cash-flow gap. Credit-card debt is surging to pre-pandemic highs, with total card balances in the U.S. hitting $916 billion in September. Outstanding balances are up 9% year to date and are now 23% higher than the pandemic low in April 2021. Plus, according to the U.S. Bureau of Economic Analysis, the personal savings rate as a share of disposable personal income fell to 3.3% in the third quarter. This is one of the lowest readings on record dating back to the 1940s, which is also a far cry from the 26.4% savings rate set at the height of the pandemic in 2020. So, while more spending and account openings create the near-term optics of a healthy consumer, longer term, the dynamic will destroy disposable income at an even faster rate. In other words, families must maintain basic spending habits regardless of what happens. All of this points to economic conditions deteriorating further. But that is exactly the outcome the Fed is seeking. And fortunately for us, based on what we are seeing, it appears the central bank may have limited runway left to raise rates even higher. That means a slowdown in rate hikes may be coming soon. When it does, it will serve as a tailwind for investors to jump back into riskier assets like stocks, as well as provide a rebound for consumers’ financial health. Within the S&P 500 Index, nine of the 11 sectors finished higher. European Markets closed positive on Friday. Markets ended higher despite little change in the market narrative heading into the weekend. Positive sentiment gained momentum as a multitude of Fed and European Central Bank officials hinted at a slower pace of rate hikes ahead. ECB President Christine Lagarde maintained her tough rhetoric on curbing inflation, emphasising that rates will continue to rise until inflation returns to its neutral target. Finally, U.K. Retail Sales rebounded in October with the U.K. GfK Consumer Confidence inching higher despite sitting near record lows still. In Asia, Markets ended mixed after a quiet day of trading. Overarching themes continue to influence investors – highlighted by the recent moves by China to ease COVID-19 restrictions, declining global demand affecting manufacturing output, and central bank rate hikes that are expected to continue. But China’s daily COVID-19 inflections continue to surge, with a new high of 25,000 reported. Japan’s October core inflation rose to a 40-year high of 3.6% year over year – putting more pressure on current monetary policy decision by the Bank of Japan. In other news, Chinese President Xi Jinping and Japanese Prime Minister Fumio Kishida agree to improve dialogue following tensions over Taiwan. Elsewhere, Oil fell1.68% while a stronger Dollar saw Gold close lower by 0.66%.
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