Geopolitics, Inflation and Earnings

Oct 16, 2023

By Jack Kraft, CFA, Investment Strategist
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U.S. equities were mixed last week as geopolitical uncertainty and the start of third-quarter earnings season brought about volatility to equities, Treasuries and commodities. The S&P 500 gained 0.5% during the five-day stretch and clocked its second-straight weekly advance. The Dow Jones outperformed other major indices adding 0.7% as investors favored more value-oriented sectors. Meanwhile, the Nasdaq Composite ticked down 0.2% for the week. Elsewhere, commodities rallied with both gold and WTI crude prices jumping more than 5% last week amid the horrific conflict in the Middle East between Israel and Hamas.

Third-quarter earnings season saw favorable reports from Financials last week with JPMorgan, Wells Fargo, and Citi all beating earnings expectations. Across the banks, better-than-feared net charge-offs and provisions boosted investor sentiment as fears surrounding credit have weighed on the sector recently. As earnings season continues this week, a couple of themes investors will be watching are the impact of weight-loss drugs (GLP-1), AI tailwinds, big tech earnings growth, holiday outlook from retailers, consumer resilience and household balance sheet strength. In sector performance, eight of the 11 S&P 500 sectors ended the week in positive territory with Energy, Utility, and Real Estate stocks outperforming.

Our thoughts are with those affected by the shocking attacks on Israel that occurred Oct. 7 and have since sparked ongoing conflict in the region. As a result, pockets of the market have experienced volatility, especially WTI crude oil, which rallied on Friday amid reports that Israel is preparing for a ground invasion of Gaza. Much of the price action in oil has been from geopolitical uncertainty rather than disruption to oil production, which has not been materially affected as of now. As the conflict continues, financial market risks look to be largely contained unless the conflict spreads to other countries in the region, which at the moment there is little indication of that happening. Natural gas has been affected with prices on the rise as the conflict disrupted pipelines and shut down offshore natural gas fields. This, coupled with forecasts for colder weather ahead, has caused increases in European gas prices.

Back in the U.S., the dollar strengthened last week with the dollar index up 0.6% and has now been higher 12 of the past 13 weeks as a higher-for-longer interest rate environment supports the greenback. Meanwhile, the Treasury market remained volatile with the 10-year yield bouncing between 4.5% and 4.7% before ultimately settling near 4.6% to end the week. This volatility has been associated with less hawkish Fed speak and supply/demand mismatch in the Treasury market amid increasing bill auction sizes in anticipation of larger federal deficits in October and November. Rate strategists at Goldman Sachs argue that the increased Treasury supply limits further upward swings in Treasury yields and the attractive level of current yields will continue to sustain retail demand for fixed income. Households have been adding Treasuries to their portfolios since the start of the year. In fact, 9% of outstanding Treasuries are now owned by households up from just 2% at the start of 2022.

On the inflation front last week, the September Consumer Price Index (CPI) print increased 0.4%, higher than anticipated by economists. Core CPI, which excludes volatile food and energy prices, rose in line with expectations at 0.3% month-over-month and 4.1% annually. Diving into the report, inflation remains sticky in core services that include categories such as rent, travel prices, and hospital services that were all firmer than expected last month. Despite the hotter-than-expected inflation report and strong jobs report earlier in the month, Fed officials seem to be signaling no change to its benchmark policy rate at its upcoming November meeting. The common theme coming from policymakers was that they are in “wait-and-see” mode and the recent rise in bond yields has already done some of the work tightening financial conditions.

Looking to the week ahead, investors will have no shortage of catalysts with a jam-packed week of earnings releases and economic data. Earnings reports will be in focus next week with notable profit reports from Bank of America (BAC), Goldman Sachs (GS), Johnson & Johnson (JNJ), Lockheed Martin (LMT), United Airlines (UAL), Abbott Labs (ABT), Intuitive Surgical (ISRG), Lam Research (LRCX), Netflix (NFLX), and Tesla (TSLA). Headlining the economic calendar will be September retail sales data and an update on the Empire Manufacturing index on Monday. Real estate updates will also hit the tape with September housing starts and building permits on Wednesday and an update on existing home sales on Thursday. In central bank news, the Federal Reserve will release its Beige Book, which provides qualitative assessments of current economic conditions across the Federal Reserve’s 12 districts. In addition, Federal Reserve Chairman Jerome Powell is scheduled to participate in an Economic Club of New York Event next week and will be one of his last appearances before the Fed enters into its blackout period ahead of its November meeting.

U.S. Economic Calendar October 2-6

Monday, October 16
Time Release Name For Consensus Prior
8:30 Empire Manufacturing Oct -3 1.9
Tuesday, October 17
Time Release Name For Consensus Prior
8:30 Retail Sales ex Autos Sep 0.20% 0.60%
8:30 Retail Sales Sep 0.30% 0.60%
9:15 Capacity Utilization Sep 79.60% 79.70%
9:15 Industrial Production Sep -0.10% 0.40%
10:00 Business Inventories Aug 0.30% 0%
10:00 NAHB Housing Market Index Oct 45 45
Wednesday, October 18
Time Release Name For Consensus Prior
7:00 MBA Mortgage Purchase Applications 13-Oct n/a 0.60%
8:30 Building Permits Sep +1450K +1541K
8:30 Housing Starts Sep +1380K +1283K
Thursday, October 19
Time Release Name For Consensus Prior
8:30 Initial Jobless Claims 14-Oct +210.5K +209K
8:30 Continuing Claims 7-Oct +1697.5K +1702K
8:30 Philadelphia Fed Index Oct -6.6 -13.5
10:00 Existing Home Sales Sep +3900K +4040K
10:00 Leading Indicators Sep -0.40% -0.40%
Friday, October 20
Time Release Name For Consensus Prior
No Major Releases


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