Friday, July 1, 2022
U.S. and International Equities
U.S. Markets Finish Lower
The U.S. major market indexes finished lower to end the first half of 2022. Investors continue to remain concerned about the possibility of a recession amid stubbornly high inflation and tightening monetary policy worldwide. Inflation and Federal Reserve (Fed) policy will remain the major themes for the rest of this year. Moreover, Q2 earning reports will start to roll in the middle of this month, which will provide additional guidance on the direction of the economy and inflation. This is especially important as some market participants believe that the full impact of inflation has not yet been reflected in earnings estimates.
Amid challenges globally, both developed international stocks (MSCI EAFE) and emerging markets (MSCI EM) finished the week lower. COVID-19 conditions continued to improve in China. The situation still remains delicate given the spread of the virus and China’s aggressive COVID-19 containment measures.
Utility stocks show some signs of life this week as investors appear to be shifting toward more defensive sectors. In addition, investors are betting that utility companies will be able to successfully pass along inflationary costs to consumers. Outside of the energy sector, the traditional defensive sectors, consumer staples and health care, are outperforming the market, even though these sectors are down in 2022.
Fixed Income Claws Back Some Ground
The Bloomberg Aggregate Bond Index finished higher for the second straight week. The 10-year U.S Treasury bond yield declined to just over 2.9% from 3.1% a week ago. High-yield corporate bonds, as tracked by the Bloomberg High Yield index, finished lower and still remains negative for the year. Monetary policy continues to affect the performance of fixed income, with investors preferring higher credit quality.
Commodities Mostly Lower for a Third Straight Week
Natural gas prices fell again this week as they post their worst month this June in over three years. An inventory report this week showing a larger-than-expected build up in inventory sparked fears of a potentially oversupplied market. In addition, the major metals, gold, silver, and copper, finished lower for a third straight week. Even as inflation appears resinous, the actions of commodity investors could be indicating that perhaps an economic slowdown may be on the horizon, as commodity demand would dampen under such a scenario.
Economic Weekly Roundup
Personal Consumption Expenditures
The May core PCE price index fell to over 4.5%, year-over-year from just under 5% in April and over 5% in March. Price conditions in the U.S. are best understood by breaking out goods inflation from services inflation as goods inflation is presently showing signs of slowing. A major concern for the Federal Reserve is that supply chains are not yet fully restored and the surge in travel-related demand is pushing services inflation higher.
Tuesday’s June consumer confidence report came in at a 16-month low as the inflationary effects of rising gas and food prices affect consumers’ outlook for the economy. In addition to June’s weaker-than-expected consumer confidence reading, consumer expectations for the economy fell to roughly a 10-year low. Per the report, many consumers consider the possibility that economic growth will weaken significantly in the second half of this year.
European consumer confidence for June fell the lowest since March 2021 as consumers become more pessimistic from the effects from tough Russian sanctions. Overall business sentiment improved from May while consumers seem to be less concerned about inflation even though Eurozone inflation rose to 8.6% in June, an all-time high.
Weekly Employment Report
Initial claims for unemployment insurance for the latest week came in lower than the prior week but missed economists’ expectations. The readings remain historically low despite the recent uptick. Continuing claims, which still remain near record lows, declined from the prior week and came in just above economists’ consensus estimate. The data continues to illustrate a very tight labor market, a culprit of the present inflationary climate.
The following economic data and potentially market-moving events are slated for the week ahead:
- Tuesday: BEA Domestic Auto Sales (June), durable and factory orders (May),
- Wednesday: Institute for Supply Management Services (June), JOLTS Job openings (May), Federal Open Market Committee meeting minutes
- Thursday: Weekly Initial and Continuing Unemployment Claims, ADP Employment Survey (June), trade balance (May)
- Friday: unemployment report (June), manufacturing and non-farm payrolls (May), wholesale inventories (May), consumer credit (May), workweek stats (June)
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