Week in Review: July 8, 2022

Markets ended the week higher as recession fears eased slightly. The current lack of clarity in economic and market data is compounding the difficulty in determining the most likely path forward for the economy. The wide range of opinions regarding the possibility of a recession means that a given data point can be interpreted in multiple ways. The recent decline in oil prices provides a good example. In early June, oil breached $123/bl, its highest level since 2008.  The concern then was that higher energy prices were adding to the strongest inflation in 40 years. Less than four weeks later, oil fell below $100/bl for the first time in over a month. While some investors were relieved, others fretted that the decline was signaling the possibility of a forthcoming recession.

The June employment report was another example of how one’s view influenced their interpretation of the data. On one hand, the stronger-than-expected reading suggested that a recession is not imminent. On the other hand, it likely provides the Federal Reserve with the necessary “cover” to raise the Fed Funds rate by another 0.75% at its July meeting, should it so choose. Higher rates serve as a headwind to economic growth and could ultimately result in a Fed-induced recession. So, which is the correct interpretation? Currently, it’s hard to say.

The Fed’s June FOMC meeting minutes revealed that the Committee remains committed to reducing inflation, even at the expense of slowing economic growth. Participants judged that “an increase of 50 or 75 basis points would likely be appropriate at the next meeting.” In addition, participants “recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist.”