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2020 Financial Markets Update

Week in Review: June 10, 2022

June 13, 2022

Recap & Commentary

Markets ended the week lower pressured by surging global inflation and attendant concerns about monetary policy. In Europe, the European Central Bank (ECB) indicated it will increase rates by 0.25% in July (its first rate hike since 2011) and again in September, perhaps by as much as 0.50%. With inflation running at 8.1%, the bank has few other options. Expectations for rising rates helped push the German 10-Year yield to 1.52%, its highest level since 2014.  A year ago, it stood at -0.23%.  Other central banks including the Reserve Banks of India and Australia both raised rates by 0.50%, highlighting the global nature of the fight against higher inflation.

In the U.S., a reacceleration of inflation in May ended any hopes that the Federal Reserve might consider pausing its rate hikes at its September meeting.  It also pushed market expectations for a 0.75% rate hike in July to over 50%. Markets now expect the Fed Funds rate to end 2022 at 3.25-3.50%, up 0.50% from a week ago.

The changing expectations were reflected in the Treasury yield curve which saw the short-end of the curve, measured by the 2-Year Treasury yield, rising 0.41%, to end the week at 3.07%. Expectations for a more aggressive Fed, and concerns of a Fed-induced recession weighed on the longer end of the curve which saw the 10-Year Treasury yield increase by only 0.22%, to 3.16%. That in turn resulted in the 2-10 spread narrowing to just 0.09%, its lowest reading since early April when the spread briefly turned negative. A negative 2-10 spread, known as an inverted yield curve, is considered a harbinger of recession.

Economic Commentary

Consumer inflation (CPI) rose 1.0% in May, pushing the year-over-year rate to 8.6%, a new 40-year high. Food and energy prices were the primary drivers, increasing 10% and 35%, respectively. And in the near-term, both are likely to remain elevated. In Ukraine, fighting is expected to continue for months, if not longer, placing continued upward pressure on global food prices. Currently there is an estimated 20M tons of grains stuck in the country, unable to be safely exported. This despite recent attempts by several different countries to persuade Russia to allow Ukraine to resume exports. Energy prices are also likely to remain high due to sanctions on Russia’s energy sector. In addition, here in the U.S., the next several months will see a surge in demand as millions hit the road for summer vacations. Highlighting the continued rise in energy prices, the national average for unleaded gasoline in the U.S. exceeded $5/gallon, the first time it has ever breached that level.

Higher inflation helped push consumer sentiment in the first part of June to the lowest level on record, dating back to 1952. Higher gas prices were cited by 50% of survey respondents. For economists, the big concern is that declining sentiment will translate into decreased spending, leading to an economic slowdown, or even recession. Thus far, however, consumer spending has held up reasonably well.

Of Note

Just days after lifting a two-month shutdown of Shanghai, authorities required over half of the city’s 25M residents to submit to new coronavirus testing, raising fears of another potential lockdown.

S&P 500-5.1%
Small Caps-4.4%
Intl. Developed-4.7%
Intl. Emerging-0.6%
U.S. Bond Market-1.5%
10-Year Treas. Yield3.16%
U.S. Dollar2.0%
WTI Oil ($/bl)$120
Gold ($/oz)$1,875

The Week Ahead

  • Producer Inflation (PPI)
  • Retail Sales
  • Housing Starts
  • Industrial Production
  • Weekly Jobless Claims

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