Week in Review: August 5, 2022
August 8, 2022
Recap & Commentary
Markets eked out positive returns for the week as investors continued to assess second-quarter earnings reports while wrestling with the implications of a significantly stronger-than-expected jobs report. Oil settled below $90/barrel for the first time since Russia’s invasion of Ukraine as concerns of weaker demand in the face of slowing economic growth continued to weigh on the commodity.
July’s employment report was stronger than expected and concluded the recovery of the 21.4M jobs lost in March and April 2020. It also represented a double-edged sword for investors. On the one hand, the 528K new jobs added in the month assuaged some of the recent concerns of an impending recession. On the other hand, the report fueled renewed expectations that the Federal Reserve will be forced to raise rates by another 0.75% when it meets in September. On the latter point, there will be multiple inflation readings and other important economic data releases before the meeting, likely resulting in changing expectations about the ultimate size of the increase prior to its announcement.
Throughout the week, multiple Fed members shared their outlook on future rate hikes. Though the specifics varied, the general message was similar: the Fed must remain aggressive in its efforts to subdue inflation.
87% of S&P 500 companies had reported 2Q22 earnings through Friday, and 75% of those companies beat their earnings estimate. Aggregate earnings growth is expected to be 6.7%, according to industry group FactSet.
Nonfarm payrolls added 528K jobs in July, the strongest monthly gain since February and over twice the expected 250K jobs. Unemployment ticked down 0.1% to 3.5%, tied with January and February 2020 for the lowest level since 1969. Average hourly wages increased 5.2% from a year ago, the same pace as June, placing continued upward pressure on inflation. Economists had expected wage growth to slow slightly to 4.9%.
Though the Fed’s efforts to slow the economy and bring inflation under control did not impact hiring in July, that does not mean they are not having an effect. The number of job openings slipped from 11.3M to 10.7M in June, reducing the number of jobs per unemployed persons from 1.9 to 1.8. While that marks progress, the current ratio remains well above the 1.2 level seen before 2020.
Data from industry group ISM revealed that manufacturing and services sector activity continued to expand in July. Within manufacturing, the pace of expansion remained steady, while service sector activity accelerated from June levels. Employment remained a challenge, with both sectors struggling to attract and retain employees. In a hopeful sign for inflation, manufacturing input prices decelerated sharply to their slowest pace since August 2020. Pricing pressures within the services sector also eased but to a lesser extent.
The Senate passed the $750B Inflation Reduction Act. Among its major provisions, the bill will provide ~$370B for energy and climate initiatives, lower the cost of prescription medicines, impose a minimum 15% corporate tax rate, impose a 1% tax on corporate buybacks, and reduce the deficit by ~$300B.
|U.S. Bond Market||-1.0%|
|10-Year Treas. Yield||2.83%|
|WTI Oil ($/bl)||$89|
The Week Ahead
- Consumer Inflation (CPI)
- Producer Inflation (PPI)
- Consumer Sentiment
- Weekly Jobless Claims