Weekly Macro Minute

GuideStone Reflections

Then God said to him in the dream… “Now return the man’s wife, for he is a prophet, and he will pray for you and you will live.” (Genesis 20:6 – 7, CSB)

When the wealthy herdsman Abraham moved into the land of Gerar, he brought along his attractive sister, Sarah. King Abimelech decided he wanted Sarah for himself, so he had her brought into his harem. However, Sarah was not Abraham's sister but his wife! Abraham had lied about who she was, thinking that the king would be more likely to act friendly towards a potential brother-in-law than a competitor for Sarah's attention. Suddenly Abimelech found himself in hot water with Abraham's God. Readers of the book of Genesis know that this was the second time Abraham had tried a stunt like this, and both times God had to bail him out because of his lie.

However, notice how God referred to Abraham in this story: “a prophet.” Habitual lying is not exactly prophet-like behavior, is it? Fortunately, God’s word shapes reality. In the middle of Abraham’s sin, God still saw a prophet. Like Abraham, we sometimes engage in less-than-godly behavior, but God still views us as redeemed, even in the middle of our sin. That is what makes God’s grace so amazing. God looks at us through the blood of His Son. Amid our messiness, He sees us as what He called us to be.

In the Economy

A hawkish Federal Reserve sent stocks materially lower on the week as financial markets got a reality check that rates are headed substantially higher. The Fed raised rates 75 basis points and signaled via the dot plot points that rates are expected to reach 4.5% by year-end and stay near those levels through 2023. If the Fed delivers, this will be the fastest one-year increase in policy rates since 1981. Any lingering hopes of a soft landing were dashed as Fed Chairman Powell acknowledged the risks of recession yet staked the central bank's credibility on getting inflation to 2% and pledging to "keep at it until the job is done." Recession is now the bigger worry than inflation, as the Fed looks poised to hike until something breaks. Sentiment is very bearish, and on Friday, traders piled into put protection in the U.S. at the fastest pace on record.

The S&P 500^® fell for a fourth consecutive week of losses, with price declines accelerating after the Fed meeting. Stocks have lost 10% over the last two weeks, with the Index hovering near the prior June lows. While volatility measures rose on Friday, they remain shy of levels that would signal panic. A sobering reality is that while the Index is down over 23% from its peak, we are almost certainly not at a market bottom. Valuations (i.e., Price/Earnings multiples) are still too high at current interest rate levels for a bear market bottom. Furthermore, a market bottom has never occurred while the Federal Reserve was still hiking rates.

Leading Income Indicators (LEIs) fell for a sixth straight month. Cumulative declines of this magnitude have ALWAYS signaled a recession. On the bright side, S&P Global reported a surprisingly strong Purchasing Managers' Index, indicating that manufacturing activity strengthened (rising to 51.8 from 51.5), while the decline in services slowed (rising to 49.2 from 43.7). Weekly jobless claims came in at 213K, bringing the four-week moving average to its lowest level in 3 months. Continued strength in the labor market will keep the Fed moving aggressively and make inflationary pressures more stubborn, as wage pressures will remain until employment softens meaningfully.

European stock markets plunged 7 to 8% on the week, breaking decisively below early 2022 lows on fears of a hard landing. Yields rose to fresh decade highs as aggressive central bank rate hikes across the continent boosted expectations of future policy tightening. The U.K. pound fell to a 37-year low of 1.09 per USD. The Japanese stock market closed 2.6% lower on the week as the government intervened in the currency market to drive away speculators and support a plunging Yen for the first time since 1998. Japan continued its aggressively easy monetary policy while inflation there accelerated to an eight-year high of 2.8% in August. Meanwhile, China's growth prospects continue to be downgraded, with the latest estimate at 3.3% from the Asia Development Bank.

Across the Markets

• Fixed income yields rose to levels not seen since 2007 in the worst rout for bonds since 1949.
• The week ended with the U.S. 2-year/10-year yield curve inversion at a new high of 52 basis points, with 2-year yields now at 4.20%.
• All commodity sectors were lower for a second week as dollar strength continued its momentum.
• The price of WTI plunged below $79/bbl on Friday, a level not seen since January.
• The Atlanta Fed GDPNow estimate for U.S. real GDP growth for the third quarter of 2022 declined again to just 0.3%, making the prospect of a third negative quarter of GDP increasingly likely.