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2020 Financial Markets Update

Week in Review: July 15, 2022

July 18, 2022

Recap & Commentary

Markets ended the week lower as investors digested unexpectedly strong inflation data, along with the start of earnings season. The dollar continued its recent ascent, reaching parity with the Euro for the first time since 2002.

Consumer inflation continued to accelerate in June, rising 9.1% from the prior year, the fastest pace since 1981. Markets reacted immediately to the news, with odds of the Federal Reserve raising rates by 1.0% at its upcoming meeting jumping from 8% to 80%. However, following comments from several Fed members expressing support for another 0.75% rate hike in July, the odds of a 1% rate hike ended the week at 31%. The last time the Fed raised rates a full 1.0% was in the early 1980s when the late Paul Volker chaired the Fed.

The Fed’s commitment to aggressively tackling inflation coupled with ongoing concerns about the strength of the European economy, resulted in the Euro falling to parity with the dollar for the first time in 20 years. While that may be good for U.S. tourists interested in taking a European vacation, it is not necessarily good for U.S. companies. A stronger dollar reduces the competitiveness of U.S. exports abroad, makes dollar-denominated commodities more expensive, puts additional financial stress on foreign countries with dollar-denominated debt, and erodes the foreign earnings of U.S.-domiciled multi-national companies.

Economic Commentary

Monthly consumer inflation rose 1.3% in June and 9.1% from a year ago. Energy prices contributed nearly half of the monthly increase, rising 7.5%. Compared to a year ago, energy prices rose 41.6%, while food prices rose 10.4%, the largest such increases since 1980 and 1981, respectively. Core inflation (excluding food and energy prices) rose 5.9% from a year ago, 0.1% slower than the 6.0% pace recorded in May. With gasoline prices falling nearly $0.40/gal since June, some analysts believe that inflation may have peaked. However, similar pronouncements from earlier this year proved to be premature.

Consumer sentiment rebounded slightly in the first half of July led by an improvement in the current conditions component. Perhaps more importantly, consumers’ inflation expectations declined slightly with the one-year outlook falling from 0.1% to 5.2%, while the five-year outlook fell from 3.1% to 2.8%. That was likely welcome news for the Fed as they remain concerned that higher inflation could become “entrenched”.

Higher prices did not dissuade consumers from spending in June as retail sales rose 1.0%. While the figures are not adjusted for inflation, they did help to assuage some concerns of an imminent recession. With recession fears rising, the retail figures combined with recent employment data suggest that consumers, the backbone of economic growth, remain in relatively strong shape.

Of Note

China’s GDP expanded just 0.4% in 2Q22, reflecting the impact of strict COVID lockdowns in many parts of the country. Growth is expected to improve in 3Q22 as lockdowns are lifted. However, recent detection of the newest coronavirus variant in Shanghai raises the specter of additional lockdowns.

S&P 500-0.9%
Small Caps-1.4%
Intl. Developed-1.8%
Intl. Emerging-3.8%
U.S. Bond Market0.9%
10-Year Treas. Yield2.92%
U.S. Dollar0.7%
WTI Oil ($/bl)$98
Gold ($/oz)$1,707

The Week Ahead

  • Housing Starts
  • Existing Home Sales
  • Philly Fed Manufacturing
  • Weekly Jobless Claims

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