Wednesday, September 14, 2022
U.S. Equities Lower
The major market indexes finished lower in August. A sharp rebound for stocks during the prior month came as expectations concerning slowing growth has some investors believing the Federal Reserve (Fed) will likely scale back interest rate increases later this year. Markets got an unwelcomed reminder from Federal Reserve (Fed) Chairman Powell in his speech at Jackson Hole that fighting inflation remains the central bank’s top priority and that rates may stay higher for longer than anticipated.
Even amid concerns about the global economic landscape, emerging market equities finished the month higher. The agreement between the China Securities Regulatory Commission and the U.S. Public Company Accounting Oversight Board over financial reporting helped equity performance.
Oil fell for the second straight month in August as some believe that energy’s dominating run in 2022 might be stalling on the potential for a slowing economy. However, natural gas was up sharply again despite concerns about Europe pipeline supplies. The major metals, gold, silver, and copper lost ground for the fifth straight month, despite inflationary conditions.
Fixed Income Lower
The Bloomberg Aggregate Bond Index and high-yield corporate bonds, as tracked by the Bloomberg High Yield index, finished lower on the Fed’s hawkish monetary stance. Both developed international bonds (Citigroup World Government Bond Index) and emerging market debt (JP Morgan Emerging Markets Global Bond Index) lost ground in July as many international central banks followed the Federal Reserve’s hawkish stance on rates.
U.S. Economic Data Recap
Inflation: July headline CPI was unchanged from June as gas prices declined, while shelter and food prices increased. The annual rate of inflation cooled to 8.5% from over 9% in June. Transportation costs declined over 2% from a month ago, which might be a sign of declining travel demand. Also, inflation is easing as durable goods prices continue their descent from recent highs but consumers are feeling the pressure from both rising shelter and food prices.
July producer prices declined 0.5% month-over-month and wholesale prices fell for the first time in two years as a plunge in energy prices slowed the pace of inflation. This beat economists’ expectations. On a year-over-year basis, prices increased 9.8% which represents the lowest rate since October 2021. Energy, which declined 9% at the wholesale level, accounted for 80% of the total decline in goods prices. Taking out food, energy and trade services, wholesale prices increased 0.2% in July, which was less than what economists expected. Core wholesale prices rose 5.8% vs. July 2021.
U.S. consumer: Consumer confidence rebounded better than expected in August after three straight monthly declines. Vacation intentions increased to an eight-month high, a potentially positive signal for consumer spending amid inflation pressures. The Present Situation Index, based on consumers’ assessment of current business and labor market conditions, increased compared to July.
Retail sales: Retail sales in July were unchanged vs. June, which came in below economists’ expectations. Declining fuel prices depressed gas station sales as consumers appeared to use the savings for other goods as online sales increased over 2.5% while miscellaneous store sales increased 1.5%. Food sales increased fractionally, however, as the Bureau of Labor Statistics food price index increased over 1% for the month. Sales at bars and restaurants also struggled, rising only a fraction compared to June.
U.S. home sales: Existing home sales fell almost 6% in July, the sixth consecutive month of declines as higher interest rates weigh on housing affordability and prospective buyers. As the housing market slowed, so did prices. The median price for a single family home was over $410,000, a decline of roughly $10,000 from June. However, homes do not stay on the market long. Over the last two months, homes were on the market for an average of only 14 days, three days shorter than a year ago.
Small business sentiment: The National Federation of Independent Business (NFIB) July Small Business Index continued to show that many of the same challenges that have affected small businesses for over a year have not dissipated. The index rose fractionally from June, but the index reading came in below its 48-year average for the sixth straight month. Thirty-seven percent of small business owners reported that inflation was their largest challenge, which represents an increase from June. Moreover, this was the highest level seen for inflation since the fourth quarter of 1979.
Federal Reserve News: The minutes from the Federal Open Market Committee stated that Federal Reserve (Fed) likely would not pull back on its hawkish sentiment until inflation retreats substantially. They did not provide specific guidance for future increases, but the Fed indicated that they would be watching data closely before making an interest rate decision. The minutes noted that some Fed members expressed concern that it could overshoot with rate hikes, underscoring the importance of being data-dependent. LPL Research’s base case is that the Fed will most likely raise interest rates another 75 basis points at the September meeting.
U.S. employment: August payrolls increased by 315,000 as the unemployment rate ticked up to 3.7%. The labor market is moving in the right direction for policy makers. An uptick in unemployment along with a modest increase in the participation rate means that the labor market in August was less tight than it was in the prior month.
August witnessed apprehension from investors amid better-than-expected Q2 earnings. An aggressive Federal Reserve with a mixed-to-poor track record of navigating a soft landing, , China economic concerns, disrupted supply chains, overly optimistic earnings estimates, and the ongoing Russia-Ukraine war continue to give a lot for investors to ponder.
We expect the Federal Reserve to increase interest rates 0.75% this month. Moreover, we believe that while we may have reached peak inflation, the present global pricing landscape remains challenging given European energy concerns along with the continuation of China’s COVID-19 lockdowns.
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