This past week highlighted the ongoing struggle between the positive forces of lower inflation and Fed officials trying to prevent an outbreak of “irrational exuberance” in financial markets.
- October CPI and PPI (Producer Price Index) inflation are lower on a monthly, quarterly and last 12 months basis. JPMorgan expects US inflation to average 4% this quarter vs 10% in the first half of 2022.
- Internationally, Europe’s energy outlook has improved, and China is showing signs of starting to move away from COVID lockdowns and towards reopening production. Meanwhile, U.S. supply chain problems are mostly behind us.
- Fed officials pushed back against markets reacting positively to weaker inflation: “still have a ways to go,” “one month’s data is not enough,” “will err on the side of irradicating inflation,” etc, all with the result that Fed Funds futures are pricing in a 5% peak in 2023 – but with rates declining in the second half of 2023.
Mid-term elections have left Democrats with control of the Senate and Republicans with its smallest majority in the House since 1932.
- Biden Administration tax and spending initiatives are no longer likely to advance without Republican support or in a “lame duck” Congress before the end of this year.
- Essential spending measures, and increasing the debt limit to finance Congressional spending, will become contentious and chaotic in 2023 and likely will increase financial market volatility in the event of a U.S. government shutdown or a default on its debt.
- There is a strong chance that the SECURE 2.0 legislation will pass before the end of 2022, revising existing rules for retirement saving and required minimum distributions.
- It is interesting to note that Florida Governor DeSantis’ gerrymander picked up 4 Republican House seats in 2022 and may have given Republicans their majority.
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