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Midterm Elections and CPI in Focus – Nov. 6, 2022

Stocks came under pressure last week after Fed Chair Powell dispelled any notion of slowing the pace of interest rate increases. Employment indicators continued to portray resilience. Investors will focus on the outcome of the midterm elections and October consumer price index data this week.

The Federal Reserve raised the benchmark federal funds rate by 0.75% last week to the 3.75–4.00% range. Chairman Powell said that the Fed’s inflation fight is far from over and that it is “premature” to discuss pausing interest rate increases.

Powell also said the economic data since the September 20-21 Fed meeting suggest that the “ultimate level of interest rates will be higher than previously expected.”

The economic data that came out last week did little to alter the above expectations. The job market continued to be resilient and overshadowed any weakness in manufacturing.

The Labor Department reported the economy added 261,000 jobs in October, topping economists’ forecast of 205,000. Average hourly wages increased by 0.4%, exceeding economists’ 0.3% estimate. The unemployment rate rose to 3.7% in October from 3.5% in September.

The Bureau of Labor Statistics reported that job vacancies increased by 500,000 from August to 10.72 million in September.

In other economic data, the Institute of Supply Management’s manufacturing index fell to 50.2 in October, its lowest level in nearly 30 months.

Stocks came under pressure as bond yields rose in response to Powell’s comments on the outlook for interest rates. The S&P 500 fell below its 50-day moving average.

For the week ending November 04, the S&P 500 (SPY) fell 3.3%. Three of the 11 sectors advanced.

Energy (XLE) gained the most, while communication services (XLC) lost the most.

Sector returns for the week ending November 04, 2022

Leading and lagging sectors for the week ending November 04, 2022.

The S&P 500’s top 10 winners included the following:

1. Health Care Sector

  • Abiomed (ABMD) +45% – The week’s top performer in the S&P 500.
  • Hologic (HOLX) +12%

2. Consumer Discretionary Sector

  • Wynn Resorts (WYNN) +21%
  • Las Vegas Sands (LVs) +8%
  • Aptiv PLC (APTV) +8%

3. Industrial Sector

  • Boeing (BA) +11%
  • Johnson Controls Intl (JCI) +9%

4. Materials Sector

  • Freeport-McMoRan (FCX) +9%
  • Air Products and Chemicals (APD) +9%

5. Information Technology Sector

  • Arista Networks (ANET) +8%

Top ETFs for the week

The following ETF themes worked well: China tech, China, natural gas, copper miners, and silver. The top ETFs for the week include:

  • KraneShares CSI China Internet ETF (KWEB) 19.6%
  • iShares MSCI China ETF (MCHI) 12.2%
  • United States Natural Gas Fund, LP (UNG) 11.4%
  • Global X Copper Miners ETF (COPX) 9.9%
  • iShares Silver Trust (SLV) 8.6%

Midterm Elections and CPI in Focus

* Investors are looking ahead to the November 8th midterm elections, with the control of Congress at stake. Pollsters expect the Republicans to take control of the House of Representatives from the Democrats. While the Senate race is tighter, it too may be tilted in favor of the Republicans. A Republican-controlled Congress can curtail President Biden’s ability to pass the Democratic Party’s legislation after the midterm elections.

* Investors will get an update on the inflation reading when the Labor Department reports the October Consumer Price Index (CPI) on Thursday. Economists surveyed by Dow Jones expect core inflation, excluding food and energy costs, to rise 0.5% in October, a tad below the 0.6% recorded in September. Economists expect core inflation to increase by 6.5% for the 12 months ending in October, compared to the 6.6% increase recorded in September.

* The calendar of Federal Reserve officials is busy this week, with several regional bank presidents scheduled to speak. Investors will look for insights into how federal reserve officials perceive recent economic data and if a change in the size of interest rate increases could be in the offing.

* The third quarter earnings season slows with nearly two dozen S&P 500 companies reporting. Activision Blizzard, Becton, Dickinson & Co., Constellation Energy, Disney, DuPont de Nemours, and Occidental Petroleum are among the S&P 500 companies reporting earnings.

* Media outlets have reported over the weekend that Chinese health officials will continue to adhere to the current “zero-COVID” policy. The rally in commodities, spurred by hopes of China loosening its “zero-COVID” policy last week, could reverse this week.

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