Weekly Macro Minute

GuideStone Reflections

When they said, “Give us a king to judge us,” Samuel considered their demand wrong, so he prayed to the Lord. But the Lord told him, “Listen to the people and everything they say to you. They have not rejected you; they have rejected me as their king.

1 Samuel 8:6 – 7 (CSB)

For centuries, the Israelites had lived as a loose confederation of tribes, guided periodically by men known as judges. As life became more chaotic in the land of Canaan, they decided that they had had enough, so they approached Samuel to appoint a king for them. Both Samuel and the Lord saw their demand as disobedient. But from the time of Moses, God had made it clear that he had a plan for a king of Israel (Deuteronomy 17). So why was the Israelites’ request sinful? We see the real reason in verse 20: “Then we’ll be like all the other nations: our king will judge us, go out before us, and fight our battles.” God had promised that if they followed him, he would guide them. He would fight their battles. But that wasn’t enough for them. They wanted a king on their terms, without any dependence on God. In short, they wanted the right thing for the wrong reason.

Sometimes, we’re not much different than the ancient Israelites. The things we desire and pursue may be good, and they may be things God wants us to have. Family, career, a certain income level or a particular status are not bad things in themselves. But the problem starts when we want them for our purposes and glory, not Christ’s. Wanting the right things for the wrong reasons is just as disobedient as wanting the wrong things in the first place.

In the Economy

Key Points

Last week’s market ride was certainly one for the books. At one point, the S&P 500® Index had surrendered over half its gains since the March 2020 bottom. Thursday's action saw the Index hit a session low of 3,491 before staging its fifth-largest intraday reversal of all time. Thursday morning’s Consumer Price Index (CPI) report was the root cause of the extreme turnaround. Investors initially took the stronger-than-expected report to indicate a hawkish Fed continually ratcheting up rates. But sentiment quickly took on a more positive tone on the hope that peak inflation had been reached and that the worst had passed. In summary, it can be said that Thursday served as an example of news interpreted as both good and bad in a single trading session and highlights the continued difficulty in navigating these markets. As we’ve stated before, we do not believe the markets have found a bottom yet and have further to fall.

As mentioned above, the CPI report was the biggest economic release of the week. The Index rose a greater-than-expected 0.4% in September and logged an 8.2% gain from a year ago – off its June peak of around 9% but still hovering at the highest levels since the early 1980s. Excluding food and energy prices, core CPI was even higher for the month, accelerating by 0.6%. Core inflation was up 6.6% from a year ago, its biggest 12-month gain since August 1982. The retail sales report showed that consumer spending was flat and showing signs of weakness. Clearly, the Fed still has much more work to do in tamping down inflation, and a continued hawkish stance is the most straightforward path for the foreseeable future. As of this writing, we have 17 days until the next Federal Reserve meeting, and markets are pricing in a 97% chance of a 75-basis point rate hike. Markets are pricing in a peak rate of approximately 4.9%, although several economists are calling for north of 5%. While just off recent peaks, interest rate volatility and dollar strength remain at levels where historically they’ve often led to financial crises in markets, a continued risk today for markets battling with questionable liquidity. While this continues, it will put downward pressure on risk assets and force foreign central banks to continue hiking rates.

Developed European stocks declined as a whole, but not as much as their U.S. brethren while emerging market stocks dropped by almost 4% on the week. A few specific regions, such as Germany, France and Italy, saw their specific indices rise for the week (although, to be fair, they saw a hefty sell-off in the week prior). The UK experienced a tough week as the economy unexpectedly shrank by 0.3% sequentially in August due to a fall in industrial output. As was widely reported, UK Prime Minister Liz Truss replaced the chancellor in a bid to salvage multiple tax changes that rocked markets. Lastly, the German government slashed its economic forecast of output (from 2.2% to 1.4%) for the next two years on the back of price increases, energy shortfalls and supply chain disruptions.

Japan's stock market started sluggishly amid a shortened trading week but snapped a four-day losing streak on Friday in response to the dramatic turnabout in U.S. stocks the day before and ended the week essentially flat. Meanwhile, Chinese markets rose during the week as supportive central bank comments lifted shares.

Across the Markets

• The net result of the week’s volatility was a roughly -1.5% drawdown for the S&P 500^® and an approximately -2% drawdown for global stocks.
• The typically defensive health care and consumer staples sectors held up best, while consumer discretionary and communication services lagged.
• The 2-year U.S. Treasury yield crossed 4.5%, its highest level since 2007, and the spread relative to the 10-year Treasury reached 50 basis points.
• Oil dropped by roughly $7/bbl and ended the week at just over $85.50/bbl.
• The Atlanta Fed’s GDPNow model estimate for U.S. real GDP growth for the third quarter of 2022 remained roughly flat week-over-week at 2.8%. This estimate remains north of the top end of consensus estimates (with the total range average from roughly flat to 2.5%).