Israel war adds geopolitical uncertainty, impacts likely lower rates and Fed more on pause. Important week ahead

Tom Lee, CFA
Israel war adds geopolitical uncertainty, impacts likely lower rates and Fed more on pause. Important week ahead
Israel war adds geopolitical uncertainty, impacts likely lower rates and Fed more on pause. Important week ahead

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Heads Up: There will be no Macro Minute Video This Morning

Over the weekend, war erupted in Israel-Gaza with the invasion by Hamas. The conflict is still ongoing and considerable uncertainty remains to the extent of the scope and duration. The bond market is closed on Monday with the Columbus Day holiday, but bond-related ETFs will trade. We expect markets to initially react with caution on Monday, but we expect incoming macro data to take center stage on markets as we move through the week:

  • What is our best guess on market reaction? Well, here is our initial take on 3 key markets:
    – USD <– should be stronger, not necessarily bad for stocks
    – Oil <– expect to initially rise on geopolitical risk, but demand is weak, so this will fade
    – Interest rates <– should decline sharply on risk-off, breaking “higher fever” = good for stocks
  • So, our takeaway is that interest rate movement is likely the most durable impact on stocks. On Monday, due to bond market closure, we have to watch TLT (long-term bond ETF) and other proxies. But we expect these to rally.
  • The rally in bonds (also means falling rates) could break the “short the bond market” fervor that has gripped the rates market for the past month, post-Sept FOMC. And as such, we believe a substantial decline in interest rates could happen with the 10-yr backing off from the high 4.8%-ish ranges seen lately.
  • There is a lot of incoming macro data this week and this list is shown below (see Bloomberg snip) but the keys are:
    – 10/11 Wed: Sept PPI
    – 10/12 Thu: Sept CPI
    – 10/13 Fri: U Mich Oct mid 1-yr inflation
  • So, there is a lot of data towards the end of this week. Overall, the rising geopolitical risks are not lost on the Fed. And in our view, the war risks ultimately becoming a downside driver for the US economy via a drop in consumer confidence, or by a disruption in the global economy. Thus, the potential drop in interest rates is not something that necessarily would make the Fed become more hawkish.

Bottom line: The Israel-Gaza war will add uncertainty, but the expected pullback in rates should support stocks

It feels awkard to write about equity market impacts from the Israel-Gaza war. War is a tragedy and resulting in heartbreaking loss. And yet, in our view, we do not view this conflict as altering the underlying recovery in equities. And if interest rates decline, as is anticipated, this is supportive of equity valuation.

  • We continue to prefer FAANG/Technology into year-end. QQQ
  • Industrials, particularly, Aerospace/Defense likely see some tailwinds as military-spending becomes a focus XLI. And Industrials are the sector most linked to a bottoming of US PMIs, which we believe have bottomed.
Israel war adds geopolitical uncertainty, impacts likely lower rates and Fed more on pause. Important week ahead
Source: Bloomberg

Key incoming data October

  •  10/2 10am ET September ISM Manufacturing Tame
  •  10/3 10am ET JOLTS Job Openings August Hot
  •  10/4 10am ET September ISM Services Tame
  •  10/6 8:30am ET September Jobs Report Mixed
  •  10/6 9am ET Manheim Used Vehicle Index September Final Tame
  •  10/11 8:30am ET September PPI
  •  10/11 2pm ET Sep FOMC Meeting Minutes
  •  10/12 8:30am ET September CPI
  •  10/13 10am ET U. Mich. September prelim 1-yr inflation
  •  10/16 8:30am ET October Empire Manufacturing Survey
  •  10/17 8:30am ET October New York Fed Business Activity Survey
  •  10/17 9am ET Manheim October Mid-Month Used Vehicle Value Index
  •  10/17 10am ET October NAHB Housing Market Index
  •  10/19 8:30am ET October Philly Fed Business Outlook Survey
  •  10/24 9:45am ET S&P Global PMI October Prelim
  •  10/26 8:30am ET 3Q 2023 GDP Advance
  •  10/27 8:30am ET September PCE
  •  10/27 10:00am ET Oct F UMich Sentiment and Inflation expectation
  •  10/30 10:30am ET Dallas Fed September Manufacturing Activity Survey
  •  10/31 9am ET August S&P CoreLogic CS home price
  •  10/31 10am ET October Conference Board Consumer Confidence

Key incoming data September

  •  9/1 8:30am ET August Jobs Report Tame
  •  9/1 10am ET August ISM Manufacturing Tame
  •  9/6 10am ET August ISM Services Mixed
  •  9/6 2pm ET Fed releases Beige Book Tame
  •  9/8 9am ET Manheim Used Vehicle Index August Final Tame
  •  9/8 2Q23 Fed Flow of Funds Report Tame
  •   9/13 8:30am ET August CPI Mixed
  •  9/14 8:30am ET August PPI Tame
  •  9/15 8:30am ET September Empire Manufacturing Survey Tame
  •  9/15 10am ET U. Mich. September prelim 1-yr inflation Tame
  •  9/18 8:30am ET September New York Fed Business Activity Survey Tame
  •  9/18 10am ET September NAHB Housing Market Index Tame
  •  9/19 9am ET Manheim September Mid-Month Used Vehicle Value Index Mixed
  •  9/20 2pm ET September FOMC rates decision Market saw Hawkish
  •  9/21 8:30am ET September Philly Fed Business Outlook Survey Mixed
  •  9/22 9:45am ET S&P Global PMI September Prelim
  •  9/25 10:30am ET Dallas Fed September Manufacturing Activity Survey
  •  9/26 9am ET July S&P CoreLogic CS home price
  •  9/26 10am ET September Conference Board Consumer Confidence

Key incoming data August

  • 8/1 10am ET July ISM Manufacturing Tame
  • 8/1 10am ET JOLTS Job Openings Jun Tame
  • 8/2 8:15am ADP National Employment Report Hot
  • 8/3 10am ET July ISM Services Tame
  • 8/4 8:30am ET July Jobs report Tame
  • 8/7 11am ET Manheim Used Vehicle Index July Final Tame
  • 8/10 8:30am ET July CPI Tame
  • 8/11 8:30am ET July PPI Tame
  • 8/11 10am ET U. Mich. July prelim 1-yr inflation Tame
  • 8/11 Atlanta Fed Wage Tracker July Tame
  • 8/15 8:30am ET Aug Empire Manufacturing SurveyMixed 
  • 8/15 10am ET Aug NAHB Housing Market IndexTame
  • 8/16 8:30am ET Aug New York Fed Business Activity SurveyNeutral
  • 8/16 2pm ET FOMC MinutesMixed 
  • 8/17 8:30am ET Aug Philly Fed Business Outlook Survey Positive
  • 8/17 Manheim Aug Mid-Month Used Vehicle Value IndexTame
  • 8/23 9:45am ET S&P Global PMI Aug PrelimWeak
  • 8/25 10am ET Aug Final U Mich 1-yr inflationMixed
  • 8/28 10:30am ET Dallas Fed Aug Manufacturing Activity Survey Tame
  • 8/29 9am ET June S&P CoreLogic CS home price Tame
  • 8/29 10am ET Aug Conference Board Consumer Confidence Tame
  • 8/29 10 am ET Jul JOLTS Tame
  • 8/31 8:30am ET July PCE Tame
  • 9/1 8:30am ET August NFP jobs report
  • 9/1 10am ET August ISM Manufacturing

Key incoming data July

  • 7/3 10am ET June ISM Manufacturing Tame
  • 7/6 8:15am ADP National Employment Report Hot
  • 7/6 10am ET June ISM Services Tame
  • 7/6 10 am ET May JOLTS Tame
  • 7/7 8:30am ET June Jobs report Mixed
  • 7/10 11am ET Manheim Used Vehicle Index June Final Tame
  • 7/12 8:30am ET June CPI Tame
  • 7/13 8:30am ET June PPI Tame
  • 7/13 Atlanta Fed Wage Tracker June Tame
  • 7/14 10am ET U. Mich. June prelim 1-yr inflation Mixed
  • 7/17 8:30am July Empire Manufacturing Survey
  • 7/18 8:30am July New York Fed Business Activity Survey
  • 7/18 10am July NAHB Housing Market Index in-line
  • 7/18 Manheim July Mid-Month Used Vehicle Value Index Tame
  • 7/25 9am ET May S&P CoreLogic CS home price Tame
  • 7/25 10am ET July Conference Board Consumer Confidence Tame
  • 7/26 2pm ET July FOMC rates decision Tame
  • 7/28 8:30am ET June PCE Tame
  • 7/28 8:30am ET 2Q ECI Employment Cost Index Tame
  • 7/28 10am ET July Final U Mich 1-yr inflation Tame

Key data from June

  • 6/1 10am ET May ISM Manufacturing Tame
  • 6/2 8:30am ET May Jobs report Tame
  • 6/5 10am ET May ISM Services Tame
  • 6/7 Manheim Used Vehicle Value Index May Tame
  • 6/9 Atlanta Fed Wage Tracker April Tame
  • 6/13 8:30am ET May CPI Tame
  • 6/14 8:30am ET May PPI Tame
  • 6/14 2pm ET April FOMC rates decision Tame
  • 6/16 10am ET U. Mich. May prelim 1-yr inflation Tame
  • 6/27 9am ET April S&P CoreLogic CS home price Tame
  • 6/27 10am ET June Conference Board Consumer Confidence Tame
  • 6/30 8:30am ET May PCE Tame
  • 6/30 10am ET June Final U Mich 1-yr inflation Tame

Key data from May

  • 5/1 10am ET April ISM Manufacturing (PMIs turn up) Positive inflection
  • 5/2 10am ET Mar JOLTS Softer than consensus
  • 5/3 10am ET April ISM Services Tame
  • 5/3 2pm Fed May FOMC rates decision Dovish
  • 5/5 8:30am ET April Jobs report Tame
  • 5/5 Manheim Used Vehicle Value Index April Tame
  • 5/8 2pm ET April 2023 Senior Loan Officer Opinion Survey Better than feared
  • 5/10 8:30am ET April CPI Tame
  • 5/11 8:30am ET April PPI Tame
  • 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
  • 5/12 Atlanta Fed Wage Tracker April Tame
  • 5/24 2pm ET May FOMC minutes Dovish
  • 5/26 8:30am ET PCE April Tame
  • 5/26 10am ET U. Mich. April final 1-yr inflation Tame
  • 5/31 10am ET JOLTS April job openings

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Israel war adds geopolitical uncertainty, impacts likely lower rates and Fed more on pause. Important week ahead

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