Week in Review: July 8, 2022
July 11, 2022
Recap & Commentary
Markets ended the week higher as recession fears eased slightly. The current lack of clarity in economic and market data is compounding the difficulty in determining the most likely path forward for the economy. The wide range of opinions regarding the possibility of a recession means that a given data point can be interpreted in multiple ways. The recent decline in oil prices provides a good example. In early June, oil breached $123/bl, its highest level since 2008. The concern then was that higher energy prices were adding to the strongest inflation in 40 years. Less than four weeks later, oil fell below $100/bl for the first time in over a month. While some investors were relieved, others fretted that the decline was signaling the possibility of a forthcoming recession.
The June employment report was another example of how one’s view influenced their interpretation of the data. On one hand, the stronger-than-expected reading suggested that a recession is not imminent. On the other hand, it likely provides the Federal Reserve with the necessary “cover” to raise the Fed Funds rate by another 0.75% at its July meeting, should it so choose. Higher rates serve as a headwind to economic growth and could ultimately result in a Fed-induced recession. So, which is the correct interpretation? Currently, it’s hard to say.
The Fed’s June FOMC meeting minutes revealed that the Committee remains committed to reducing inflation, even at the expense of slowing economic growth. Participants judged that “an increase of 50 or 75 basis points would likely be appropriate at the next meeting.” In addition, participants “recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist.”
Nonfarm payrolls added 372K jobs in June, 104K more than the expected 268K. The economy has now recovered 98% of the 22.0M jobs lost in March and April 2020. Unemployment remained unchanged at 3.6%. From an inflationary standpoint, annual wage growth eased slightly from 5.3% in May, to 5.1%.
Job openings in May fell from 11.68M to 11.25M. However, at 1.9x, the ratio of job openings to unemployed individuals remained near an all-time high.
Weekly jobless claims rose 4K to 235K, their highest level in 16 months. On an absolute basis however, they remain quite low. In discussing its plans to tackle inflation, the Fed has acknowledged there will be some “pain”, in the form of higher unemployment. Thus, it would not be surprising to see jobless claims rise, the ratio of job openings to unemployed individuals decline, and growth in nonfarm payrolls slow, as the Fed continues to raise rates in the months ahead.
Growth in the services sector slowed slightly in June, even as it remained solidly in expansion territory. Similar to manufacturing data released the prior week, employment fell in June due to continued challenges with attracting and retaining employees. From an inflationary standpoint, prices paid fell to their lowest level since September 2021, though they remain very high.
Mortgage rates fell 0.4%, their largest weekly decline since 2008, to end the week at 5.3%. The sharp decline was seen as another sign of a cooling economy.
|U.S. Bond Market||-0.9%|
|10-Year Treas. Yield||3.08%|
|WTI Oil ($/bl)||$105|
The Week Ahead
- Consumer Inflation (CPI)
- Producer Inflation (PPI)
- Consumer Sentiment
- Retail Sales
- Industrial Production
- Weekly Jobless Claims