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2020 Financial Markets Update

Week in Review: August 12, 2022

August 15, 2022

Recap & Commentary

Markets ended the week higher on encouraging inflation data, helping the S&P 500 notch its fourth consecutive weekly gain. Strong gains by the tech-heavy NASDAQ and Russell 2000 (small caps) resulted in both indices entering bull market territory, defined as a 20%+ gain from recent lows. That said, the two indices remain 19% and 17% below their respective all-time highs set in November 2021. The recent rally in equity markets has intensified the debate as to whether equity markets have indeed bottomed, or if they are simply experiencing a short-term bounce within a broader decline.

The release of consumer and producer inflation revealed that in aggregate, pricing pressures eased across the economy in July. Markets celebrated the news as it led to hopes that the Federal Reserve might not have to raise rates by another 0.75% at its September meeting. By Friday, markets were predicting a 0.50% increase at the next Fed meeting, whereas a week prior they were predicting a third consecutive 0.75% increase. It is important to remember that one month of data does not make a trend, and a similar “head fake” occurred in April when inflation data slowed slightly before reaccelerating. For the week at least, investors allowed themselves to celebrate the encouraging data.

Through Friday, 90% of S&P 500 companies had reported earnings. Thus far, according to S&P Global, 75% of those companies have beaten their consensus estimate, while 71% have beaten the revenue estimates.

Economic Commentary

On a headline basis, monthly consumer inflation (CPI) was unchanged in July, following a 1.3% increase in June. A 4.6% decline in energy prices was the primary factor. Food prices, however, continued to advance, rising another 1.1%. Compared to a year ago, inflation eased from a 40-year high of 9.1% to 8.5%. Excluding more volatile food and energy prices, core CPI rose 0.3% for the month and 5.9% from a year ago.

On the surface, the July data was welcome news, providing investors with a respite from a recent string of disappointing inflation reports. Beneath the surface though, signs that inflation is becoming increasingly “entrenched” intensified, something the Fed is trying hard to prevent. According to the Atlanta Fed, “sticky inflation,” which measures those prices that are slower to change, rose to their highest level since 1991. In a separate New York Fed report, consumers’ one- and three-year inflation expectations declined to 6.2% and 3.2%, respectively, from 6.8% and 3.6%. That was welcome news as Fed Chair Jay Powell has previously indicated that consumer expectations factor into the Fed’s approach to monetary policy.

Similar to consumer inflation, producer inflation (PPI) also eased in July. On a headline basis, PPI contracted 0.5%, the first outright contraction since April 2020, while the annual rate of inflation decelerated from 11.3% to 9.8%. Like CPI, much of the decline was attributable to lower energy prices.

Of Note

Overlooked by recent headlines, the “2-10” spread, the difference between the 2- and 10-Year Treasury yields, fell to -0.48% during the week, the lowest level since 2000. A negative 2-10 spread is widely viewed as a harbinger of recession.

S&P 5003.3%
Small Caps4.9%
Intl. Developed2.1%
Intl. Emerging1.4%
U.S. Bond Market0.2%
10-Year Treas. Yield2.84%
U.S. Dollar-0.9%
WTI Oil ($/bl)$92
Gold ($/oz)$1,819

The Week Ahead

  • Housing Starts
  • Existing Home Sales
  • Industrial Production
  • Retail Sales
  • Weekly Jobless Claims

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