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2020 Financial Markets Update

Week in Review: August 26, 2022

August 29, 2022

Recap & Commentary

Markets ended the week on a dour note, with the S&P 500 falling 3.4%, its largest single-day decline since mid-June. The selloff was precipitated by Federal Reserve Chair Jay Powell’s anticipated Jackson Hole speech in which he suggested the Fed intends to maintain an aggressive policy stance for longer than many market participants were expecting, or at least hoping. Interest rates, as measured by the 10-Year Treasury yield, ended the week at 3.04%, up 0.08%.

Fed Chair Jay Powell said that in the current inflationary environment, the Fed must use its tools “forcefully” to bring supply and demand into better balance, even while acknowledging that doing so will likely result in higher unemployment as well as “bring some pain to households and businesses.”  Failure to restore price stability, Powell argued, would result in “far greater” economic pain.

With respect to the next steps, Powell indicated that the Fed is likely to remain aggressive in the near term with the size of its rate hikes and that once the appropriate interest rate level to reduce inflation is achieved it will likely maintain that level for “some time.” Powell’s speech effectively threw cold water on the idea that the Fed might look to slow the pace of its rate hikes following recent data releases showing inflation decelerated some in July.

Further slowing in US and European economic activity as measured by S&P Global also weighed on investor sentiment during the week.

Economic Commentary

The Fed’s preferred measure of inflation, core personal consumption expenditures (PCE), decelerated in July, registering a monthly gain of just 0.1% while rising 4.6% from a year ago. The slower pace was consistent with Consumer Price Index (CPI) and Producer Price Index (PPI) data released earlier in the month. In his Jackson Hole speech, Powell noted the importance of the public’s inflation expectations with respect to the future path of inflation. Powell was likely pleased to see that in August, consumer expectations for 1-year inflation slowed from 5.2% to 4.8%, while 5-year expectations remained stable at 2.9%.

Second quarter Gross Domestic Product (GDP) was revised from -0.9% to -0.6% due largely to consumer spending being revised from 1.0% to 1.5%. Given the consumer’s importance to overall economic activity, the revisions support the thesis that the economy was unlikely in a recession at the end of 2Q22, despite meeting the commonly-cited definition of a recession being two consecutive quarters of negative growth.

According to industry group S&P Global, US manufacturing decelerated further in August, while the service sector experienced outright contraction. Activity in the two sectors fell to its lowest levels since July and May 2020, respectively.

Further declines in new home sales corroborated data from the prior week showing that the housing sector slowed further in July. New home sales fell 12.6% from June, and nearly 30% Y/Y, to their lowest level since early 2016. Pricing remained strong, with the median price increasing $37K to $439.4K.

Of Note

Despite growing tensions between the US and China, the two countries reached an agreement allowing US regulators to inspect Chinese audit firms. The deal tentatively avoids delisting around 200 Chinese companies from US exchanges.

S&P 500-4.0%
Small Caps-2.9%
Intl. Developed-1.9%
Intl. Emerging0.5%
U.S. Bond Market-0.4%
10-Year Treas. Yield3.04%
U.S. Dollar0.6%
WTI Oil ($/bl)$93
Gold ($/oz)$1,751

The Week Ahead

  • August Employment Report
  • ISM Manufacturing
  • Consumer Confidence
  • Weekly Jobless Claims

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