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2020 Financial Markets Update

Week in Review: September 9, 2022

September 12, 2022

Recap & Commentary

Markets ended the week higher with the S&P 500 coming out of three consecutive losing weeks. The gains came despite any significant corporate or economic data. Interest rates moved higher as expectations that the Federal Reserve will raise rates another 0.75% at its September meeting rose to 91%, up from 57% at the start of the week. The 10-Year Treasury yield gained 0.11% over the course of the week to end at 3.31%, near its mid-June highs. The 2-Year Treasury yield rose 0.16% to end the week at 3.56%, its highest level since 2007.

Responding to record high inflation, the European Central Bank (ECB) undertook its largest ever rate hike, increasing interest rates by 0.75%. Like the U.S. Federal Reserve, the ECB is determined to quell inflation, which recently rose to 9.1%. However, its efforts are further complicated by Russia’s increasing willingness to cut energy supplies to Europe in retaliation for the continent’s continued support of Ukraine.  Following Russia’s recent shutdown of a major natural gas pipeline, ostensibly for maintenance, European natural gas prices are now ~10x what they are in the U.S. Should Russia continue to constrict its energy exports, Europe’s economy faces a strong likelihood of slipping into recession. The combination of soaring energy prices and a recession would leave the ECB in a difficult position.

Speaking at a conference in the U.S., Fed Chair Jay Powell reiterated the need for the Fed to remain aggressive in its efforts to lower inflation saying that the Fed must act “strongly” and to “keep at it until the job is done.”

Economic Commentary

According to industry group Institute for Supply Management (ISM), service sector activity continued to expand in August. Employment was effectively flat for the month after a small contraction in July. New orders rose, suggesting continued consumer demand, which bodes well for future activity. From an inflationary standpoint, input prices eased for the fourth consecutive month. While the rate of deceleration was small, and the overall level remains elevated, the trend is encouraging and consistent with the slowing of input prices observed in the manufacturing sector.

Consumer credit rose by $23.8B in July, the sixth consecutive month of $20B+ increases. Through July, consumer debt (excluding mortgage balances) has increased by an average of $30B/month, far greater than any other year on record. The increase comes as consumers are faced with the fastest pace of inflation in 40 years and credit card companies are raising rates along with the Fed. While much has been made about the amount of cash consumers are sitting on following unprecedented fiscal and monetary stimulus efforts in response to the COVID-19 pandemic, the personal savings rate now stands at its lowest level since 2009. Combined, the surge in consumer debt and low savings rate suggest consumers are becoming increasingly stretched in their ability to absorb higher prices.

Of Note

Queen Elizabeth II, the longest reigning monarch of England, died on Thursday. She was 96. Ascending to the throne in 1952, her reign outlasted that of 14 different UK Prime Ministers, as well as 13 different U.S. Presidents.

S&P 5003.7%
Small Caps4.0%
Intl. Developed0.8%
Intl. Emerging-0.2%
U.S. Bond Market-0.7%
10-Year Treas. Yield3.31%
U.S. Dollar-0.5%
WTI Oil ($/bl)$86
Gold ($/oz)$1,728

The Week Ahead

  • Consumer Inflation (CPI)
  • Producer Inflation (PPI)
  • Retail Sales
  • Industrial Production
  • Consumer Sentiment
  • Weekly Jobless Claims

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