Week in Review: July 1, 2022
July 5, 2022
Recap & Commentary
Equity markets ended the week lower, spurred on by increasing recession concerns. Economic data was mixed, providing both bulls and bears with evidence to support their respective views. Comments by Federal Reserve Chair Jay Powell reinforced the Fed’s commitment to tackling inflation but provided little specific insight into future Fed actions. Fixed income returns were positive, aided by a decline in interest rates which saw the 10-Year Treasury yield fall to its lowest level since late May.
China’s economy reaccelerated in June as both the manufacturing and services sectors expanded for the first time since February. The improvement followed the lifting of various COVID-19 restrictions around the country. Those restrictions had impacted not only Chinese economic growth, but also global supply chains. How sustainable the rebound will be is uncertain, as President Xi Jinping remains committed to the country’s strict Zero-COVID policies. In recent comments, Xi said he would rather endure temporary growth setbacks than “harm people’s health.” As part of its current reopening, China reduced its mandatory quarantine for foreign travelers from two weeks, to one.
Speaking at a European Central Bank (ECB) conference, Fed Chair Jay Powell stated that the process of raising rates to tackle inflation is “highly likely to involve some pain but the worst pain would be from failing to address this high inflation and allowing it to become persistent.” That was largely in line with prior comments by Powell in which he stated that the Fed hopes to achieve a “soft landing” whereby it raises rates enough to cool inflation without causing a recession, a feat Powell has admitted will be “very challenging.”
U.S. manufacturing activity in June grew at its slowest pace in two years, reinforcing the view that the economy is slowing under the weight of higher inflation and the Fed’s tightening efforts. New orders contracted for the first time in two years, while employment contracted for a second consecutive month. From an inflationary standpoint, prices slowed for a third consecutive month, but on an absolute basis, remain extremely elevated.
Consumer confidence fell to a 16-month low, dragged down by consumers’ views of the economy six months from now, which fell to their lowest level in over nine years. One-year inflation expectations jumped from 7.5% in May to 8.0%.
The Fed’s preferred measure of inflation, core personal consumption expenditures (PCE), accelerated from a monthly pace of 0.2% in May, to 0.6% in June. However, on a year-over-year basis, the pace slowed from 4.9% to 4.7%.
Consumer spending in May rose just 0.2%, less than the consensus forecast of 0.4%, and down from April’s 0.6% pace. Higher prices are forcing consumers to pare back spending, which fell 0.4% on an inflation-adjusted basis.
Durable good orders jumped 0.7% in May, up from 0.4% in March. Core business spending rose a better-than-expected 0.5%, suggesting that business continues to spend even in the face of higher inflation and concerns of recession.
As of mid-June, a total of 45 central banks around the globe had raised rates in an effort to tackle inflation, according to industry group FactSet.
|U.S. Bond Market||1.3%|
|10-Year Treas. Yield||2.89%|
|WTI Oil ($/bl)||$108|
The Week Ahead
- June Employment Report
- ISM Services
- Consumer Credit
- Factory Orders
- Weekly Jobless Claims