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Week in Review: August 19, 2022
August 22, 2022
Recap & Commentary
Markets ended the week lower as investors assessed the recent rebound against a still uncertain backdrop for future Federal Reserve rate hikes and the economy’s overall trajectory. The decline snapped the S&P 500’s four-week winning stretch. Interest rates, measured by the 10-Year Treasury yield, ended the week at their highest level since mid-July. This was driven by the release of the Fed’s latest Federal Open Market Committee (FOMC) meeting minutes and comments from several Fed officials regarding the need for further rate hikes. The US dollar resumed its ascent, fueled by Fed rate hike expectations and ongoing concerns about the strength of the global economy, highlighted by the continued slowing in China.
The release of the Fed’s July FOMC meeting minutes provided mixed messages, rekindling fears that the Fed will remain aggressive in fighting inflation for the time being. Concerning recent signs that inflation might be slowing, due in part to lower gasoline prices, participants noted that such declines “could not be relied on as providing a basis for sustained lower inflation, as these prices could quickly rebound.” Looking ahead, participants agreed that further tightening would be necessary but would be determined by incoming data. The committee also agreed that at some point it would become appropriate to slow the pace of rate increases. However, some participants suggested that once reached, it would be appropriate to maintain a sufficiently restrictive policy rate level “for some time” to ensure inflation was receding. In short, the minutes were ambiguous enough that investors could find passages to support their preferred outlook, whatever that might be.
Economic Commentary
Housing activity continued to cool in July with housing starts and existing home sales falling 9.6% and 5.9%, respectively, from June levels. Compared to a year ago, starts fell 8.1%, while existing home sales fell 20.2%. Starts now stand at their lowest level since February 2021, while existing home sales are at their lowest level since May 2020. The slowdown in the housing market was noted in the Fed’s minutes which attributed it to “the emerging response of aggregate demand to the tightening of financial conditions associated with the ongoing firming of monetary policy.” In other words, the recent rise in mortgage rates, precipitated in part by Fed rate hikes, is sapping demand for housing.
Retail sales were flat in July, down from 0.8% growth in June. Falling gas prices allowed consumers to increase their online purchases, which rose 2.7%. Core retail sales, which exclude auto sales, rose 0.4%, while another measure of core sales excluding both autos and gasoline rose 0.7%. Corroborating the idea that higher inflation is continuing to shift consumer habits, Walmart’s CEO noted on the company’s 2Q22 earnings call that they are seeing more middle- and high-income shoppers coming into their stores, a trend known within the retail industry as “trading down.”
Of Note
According to industry group Nielsen, streaming surpassed cable TV for the first time to become the preferred method for watching television. In July, streaming represented 34.8% of total TV consumption, while cable and broadcast TV accounted for 34.4% and 21.6%, respectively.
S&P 500 | -1.2% |
Small Caps | -2.9% |
Intl. Developed | -2.3% |
Intl. Emerging | -1.5% |
Commodities | -0.7% |
U.S. Bond Market | -0.9% |
10-Year Treas. Yield | 2.96% |
U.S. Dollar | 2.3% |
WTI Oil ($/bl) | $90 |
Gold ($/oz) | $1,760 |
The Week Ahead
- New Home Sales
- Pending Home Sales
- Durable Goods Orders
- Core PCE Inflation
- Personal Income & Spending
- S&P Global PMI
- Weekly Jobless Claims
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