Monthly Update

What was already a tough investing year became even more so in September. The S&P 500 declined by 9.3%, the NASDAQ gave up 10.5% and the small cap Russell 2000 was lower by 9.7%.[1] The Euro STOXX 600 index was weaker by 6.6% and the Nikkei and Shanghai composite were down by similar amounts.[2] The South Korea Kospi sold off by 12.8%. The main reasons for the selling remain the same. We’re in a new global world of rapid monetary tightening in response to high inflation that remains well above the level of interest rates. At the same time, Europe is going through a really tough time in the face of extraordinarily high energy prices. Also, China’s economy, the 2nd biggest, is maintaining its tough stance against Covid and its residential real estate market is under stress.

The move in interest rates again was sharp and steep in September. After rising by 61 basis points in August, the 2 yr. Treasury yield rose another 79 basis points to end the month at 4.28%, a level last seen in 2007.[3] For perspective, it started the year at just .73%. The US 10 yr. yield jumped by 64 basis points in September after a 54 basis point rise in August. At 3.83%, that is a 10 yr. high.[4] More shocking was the move in UK gilt yields in September. The 2 yr. UK gilt yield started the month at 3.02% and got as high as 4.73% near month end.[5] The 10 yr. gilt yield went from 2.80% to 4.60% before the Bank of England intervened to finally calm things down, for at least the time being. German yields spiked too as they did in Australia and other countries. The pattern here is the selling in both bonds and stocks has been global.

Corporate bonds also took it on the chin in September, particularly the lowest rung of credit before default, that of the CCC category. The Bloomberg CCC index yield closed the month at 15.45%, the highest since April 2020 and its spread to Treasuries widened out by 230 basis points in September to the most since July 2020.[6]

In September, we saw a 75 basis point hike from the European Central Bank that finally took its deposit rate above zero for the first time since 2012.[7] The Federal Reserve implemented another 75 basis point interest rate increase for the 3rd meeting in a row and what shook the markets was their hint that they would do so again in November (we think they don’t, and only go 50). The Bank of England ‘only’ raised rates by 50 basis points and that led to the earthquake in the gilt market a few weeks later. We also saw rate hikes from the Swiss National Bank, the Swedish Riksbank, the Norges bank in Norway, the Bank of Indonesia, the central bank in Taiwan, the Hong Kong Monetary Authority, the BSP in the Philippines and in Vietnam too.[8] A truly global monetary tightening is taking place.

All this is happening at the same time global economic activity continues to slow. For the first time since June 2020, the JP Morgan Global Manufacturing Purchasing Managers Index fell below 50 for September, albeit slightly, which is the breakeven between expansion and contraction.

Central Banks and Interest Rates

After delaying interest rate hikes for so long in the face of ever rising inflation, central banks are certainly making up for lost time. The rapidity of the interest rate increases, particularly by the Fed, is what really has investors and the economy on edge. I have no issue with the destination of where the Fed wants to take the fed funds rate, and that is above the rate of inflation, but the velocity and speed at which they are doing so is the biggest risk and happening far faster than I believe appropriate.

The context in which the Fed and other central banks are quickly increasing interest rates (and the Fed is also reducing the size of its balance sheet) is in a global economy that has substantially increased the level of debt it has taken on over the past decade plus. Thus, we become more sensitive to changes in interest rates even if the absolute level is low when compared to historical periods. Excessive leverage also gets exposed, as it did in September with UK pension funds who took part in an investment product called Liability Driven Investments that almost blew up on them. Also, the valuations of stocks, bonds and other assets were goosed by zero cost money and quantitative easing that when reversed, has a major spillover effect on asset prices.

Inflation and Foreign Exchange

Their fight is against inflation and they are doing what they think is best to cool it. In September, we saw the August US Consumer Price Index come in up 8.3% y/o/y and the core rate was higher by 6.3%.[9] In Germany, for September they announced a 10% rate of CPI. Even Japan announced a 3% headline CPI for August which was the highest since the early 1990’s when not including the influence of value added tax hikes. Notwithstanding this in Japan, the Bank of Japan remains the one central bank holdout in that they have yet to raise rates or shift their yield curve control policy.

In most countries, the persistent weakness in their currencies relative to the US dollar has imported even more inflation, particularly on the energy side and is exaggerating the price pressures. Skyrocketing gas and power prices in Europe in response to the war is resulting in governments stepping in and capping the prices households and businesses are paying.

The positive is that maybe the extreme pressure point on inflation has been reached. In the US, goods prices are moderating and the price of oil is well off its highs. The price of natural gas in Europe is quietly at the lowest level since July as storage levels are at hoped for levels going into the winter.

The question then is to what extent does inflation slow from here and where does it eventually settle out at. Do we go back to the pre-Covid trend of 1-2% on a sustainable basis? Or, have things structurally changed that will lead to something on the order of 3-4% when the current high levels continue to come off the boil. I believe in the latter.

With respect to the US dollar, the ferocious rally continued in September and the euro/yen heavy dollar index is now up 17% as of this writing year to date.[10] The US dollar strength is a positive factor in quelling inflation and helping the purchasing power of the US consumer but on the other hand creates a lot of global stress. This includes a few parts, one for those companies and countries that have borrowed in dollars and have debt coming due it can hurt. Also, US multinationals lose revenue in their FX translation. The other pain point is for those countries that import a lot of stuff, including to satisfy their energy needs, like in Japan.

The Global Economy

In analyzing the global economy, it’s important to break it out by region. Starting in the US, we know we’ve seen GDP contraction in the first two quarters with the possibility of a positive print for Q3 according to the estimate by the Atlanta Fed. In totality though, GDP in the first three quarters of 2022 will likely have flat lined at best. All eyes are on the labor market from here as it still remains pretty good with a 3.7% unemployment rate and good wage growth, though still below the rate of inflation.

In Europe, it’s safe to say that their regional economy is in a recession as the very high energy prices puts a squeeze on both businesses and households. Governments are doing their best to mitigate the damage both by cutting demand for energy, rebuilding storage levels, procuring as much energy away from Russia and capping the prices paid, it still is not enough though as industrial parts of the economy have to cut production or outright close facilities due to the excessive energy costs.

China is fighting itself with its still aggressive approach to covid and the stop, start response with its economy. At the same time, air continues to come out of their residential real estate bubble. The net result is little growth if any and that has a spillover impact on other parts of Asia.

Everyone too is dealing with the higher cost of capital which in turn is helping to slow the most interest rate sensitive sector of them all, housing. Housing markets around the world, particularly in the US and Canada, have slowed dramatically. That though is not surprising when we combine a sharp rise in home prices over the past few years at the same time mortgage rates jump.


Again, it’s been the aggressiveness in central bank monetary tightening at the same time Europe and China have their own economic challenges that has resulted in another tough month. While we believe inflation has topped out, as it seems to, we still expect the investing environment to remain bumpy.

This said, it is important to remember that recessions and market pullbacks are a natural part of the business cycle, even though our business cycles have been polluted by central bank activism. As we continue to navigate through this, it remains vital that investors have a well thought out plan that suits their short term liquidity needs over the next 2-3 years. Knowing that period of time is covered can help separate the balance of one’s portfolio from what I believe will continue to be a challenging time for the economy and markets. Time horizon is really crucial right now and the best friend of any investor.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The market and economic data is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information in this report has been prepared from data believed to be reliable, but no representation is being made as to its accuracy and completeness.

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The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

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Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio as the principal is adjusted semiannually for inflation based on the Consumer Price Index – while providing a real rate of return guaranteed by the U.S. Government.

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Approval 380926-1

1] Bloomberg

[2] Bloomberg

[3] Bloomberg

[4] Bloomberg

[5] Bloomberg

[6] Bloomberg

[7] Bloomberg

[8] Bloomberg

[9] Bloomberg

[10] Bloomberg