Weekly Economic Update

Economic Update 6-13-2022

  • Economic data for the week included consumer price inflation coming in high in keeping with expectations. Consumer sentiment remains challenged, at its lowest levels in decades, due to high inflationary pressures, notably with gasoline. Jobless claims were little changed, when adjusted for seasonal effects.
  • Global equity markets fell back last week, as high inflation reports and poor consumer sentiment dampened risk-taking. However, emerging market stocks fared better as pandemic conditions in China appear to be improving. Bond markets fell back again with interest rates rising across the board. Commodities were mixed overall, but oil and natural gas prices continued to move higher.

U.S. stocks ended on another dour note last week, as any hopes for improvements in inflation were dashed. Markets were mixed through Thursday, when a sharp decline was driven by higher jobless claims and worries over the Friday CPI release, which turned out to be higher than expected. The World Bank has downgraded its global growth forecast from 4.1% earlier in the year, down to 2.9%, based on the impact of higher food and energy prices. This has raised the fears of rising recession probabilities, despite the still-high growth rates in the U.S. and moderate growth for Europe.

All sectors were negative last week to varying degrees, with energy faring best, with minimal losses, followed by more defensive and low-beta consumer staples and healthcare. Real estate also fell back by -6% along with higher interest rates and an anticipated negative impact on near-term financing sentiment.

While stock splits are fairly normal occurrences, the more unusual 20-for-1 split with Amazon shares caused a short-lived rally for the company, and consumer discretionary sector, of which it’s a significant component. What’s the big deal? A split doesn’t change a company’s overall market value, just rearranges the price and shares (1 sh. @ $2500 = 20 sh. @ $125). However, it has been thought to make investment in a company more accessible to smaller investors, and can also increase the appeal for inclusion into the Dow Jones Industrial Average, a price-weighted relic which uses a complicated sizing multiple that becomes more difficult with extreme share prices outside the normal range of $50, $100, etc. But, there is some cache involved with being part of the DJIA.

Foreign stocks suffered similarly to those in the U.S., with Europe coming in worst, and better results from Japan and the emerging markets. The ECB announced last week that asset purchases will end this month. This was in addition to committing to a 0.25% rate hike next month, a pace which could be raised to a 0.50% by early fall—finally moving away from their current -0.50% key deposit rate. This was more hawkish than the bank had been in some time, as concerns over inflation finally surpassed those about slow economic growth caused by pandemic supply issues and now the Ukraine war/Russian energy costs.

There had been some early speculation that they could actually raise rates this month, to combat rising inflation, but the more conservative route was taken instead, by implying that quantitative easing will be ending by July. Rate hikes of a quarter-percent each are expected to occur later in the summer. At the same time, European growth is weaker, and closer to recession than is the U.S., making a rate hike narrative more difficult. In the emerging market world, the less negative week was led by gains in China, as reopenings from lockdowns continued and the government appeared to be easing restrictions on technology companies. Coupled with substantial stimulus, investors are hoping recent poor results have troughed.

U.S. bonds were held back by the strong CPI report and ECB tightening language, causing yields to shoot higher by the end of the week. Notable is the growing flatness of the treasury curve from the 2y point all the way out to 30y; this reflects the expectations for Fed policy over the next few years in addition to an expected ‘cap’ of the neutral rate due to the expected cumulative negative impact on the economy over that time. Again, the 3m-10y part of the curve remains positively sloped, while the 2y-10y component is barely so. Strategist preferences tend to be split between those two points when assessing any curve inversions. Corporates fared a bit worse than treasuries, with yield spreads widening along with economic concerns. Foreign bonds fared especially poorly, with similar influences but also the negative impact of a 2% rise in the U.S. dollar.

Commodities were mixed on net, with gains in the energy sector offset by declines in industrial metals. The price of crude oil rose over a percent to just under $121/barrel, while natural gas prices increased another 4%. Oil price strength has been driven by expectations of higher inventories not coming to pass, coupled with the letting up of Chinese lockdowns, which has unfurled a large amount of pent-up demand. Of course, future prices aren’t possible to predict, but the combination of factors have re-accelerated these upward pressures, as drilling and refining activity continues to fall behind demand.

Period ending 6/10/20221 Week (%)YTD (%)
DJIA-4.56-12.78
S&P 500-5.04-17.60
NASDAQ-5.59-27.26
Russell 2000-4.37-19.39
MSCI-EAFE-4.65-15.80
MSCI-EM-0.53-13.58
Bloomberg U.S. Aggregate-1.52-10.65
U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.
12/31/20210.060.731.261.521.90
6/3/20221.212.662.952.963.11
6/10/20221.393.063.253.153.20

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman

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