Last week’s news was hardly uplifting for financial markets, but the S&P rallied 1.56% on Friday to close the week up 1.17%. Year-to-date the S&P is up 15.46% which is consistent with the historical average for year-3 of a presidential election cycle.
- Paul Krugman (Nobel economics prize winner and New York Times columnist) pointed out: “… America has accomplished what many, perhaps most, economists considered impossible: a large fall in inflation without a recession or even a big rise in unemployment.”
- Several indicators point to a year-end stock market rally: seasonality; rebounding investor sentiment; oversold stock markets in October; hedge funds at 5-year low net long positions, and trading strategies needing to buy back around $150B by year-end (TPW).
- U.S. oil production rebounded to 13.2 million barrels per day last week after falling to 9.8 million barrels per day in 2021 from anti-fossil fuel policies of the new administration. This turn-around will have a positive impact in lowering inflation further. Energy prices are down from more than $90 per barrel in late September to a new low of $76 this past week.
- October CPI inflation being reported tomorrow is expected to show retail gasoline prices down 4.8% from September. With this, CPI inflation likely will fall to 3.3% in October from 3.7% in September.
- So far, the higher mid- and longer-term rates don’t seem to be a big negative for tech companies or for households because of all the financing completed before the Fed started raising rates 18 months ago. With so many of the outstanding home mortgages at rates below 3%, household debt servicing costs are only back to 2019 levels and are significantly lower than the peak reached in the run up to the 2008 financial crisis.
With all of the challenges facing China, Wednesday’s meetings between China President Xi and U.S. President Biden and U.S. business leaders in San Francisco will provide a positive tone, rebalancing US-China economic interdependence and geopolitical tensions.
- Although U.S.-China relations had deteriorated over the past five years because of adversarial tensions and from China’s alignment with Russia against western nations ideologically, the share of Chinese adults who see the U.S. as an ally has risen from 25% to 45%, and of those who see the U.S. as an enemy has fallen from 75% to 48%.
- China needs U.S. technology, markets for its exports and foreign investment from the U.S.; so President Xi will be meeting in San Francisco with U.S. business leaders to rebuild relationships and reduce distrust of Xi’s policies of reimposing communist party priorities.
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