Weekly Economic Update – 7-11-2022

Economic Update 7-11-2022

  • On a holiday-shortened week, economic data included deceleration in some economic indicators, but not to the point of a feared slowdown as of yet. These included weaker, but still-strong showings from ISM services and JOLTs job openings, as well as a decent June employment report.
  • U.S. equity markets gained ground last week, offsetting declines in foreign markets, which are faced with deeper near-term energy struggles. Bonds fell back as interest rates rose broadly, upon lack of slowing needed to justify lower recessionary yields. Commodities continued to fall back from highs, notably in crude oil and natural gas.

U.S. stocks fared positively last week, with sentiment improving around the ability for the economy to potentially avoid a recession. Decent economic releases, or at least data not deteriorating, were the catalysts for the improved mood. However, this seems to be a week-to-week affair. By sector, ‘growth’ areas consumer discretionary, technology, and communications all saw gains over 3% on the week. Utility stocks fell back by -3% with higher interest rates, while energy and materials stocks also declined in keeping with the recent pullback in physical commodities. Real estate lost just under a percent on the week, with sentiment tied to yields and potential impacts on commercial and residential.

Foreign stocks were mixed to lower last week, with small gains in emerging markets and Japan offset by weakness in Europe. Results were held back by weaker growth, higher inflation, as well as a strong U.S. dollar, which rose nearly 2% on the week. Specifically, fears of a potential European energy shortage that would no doubt tip the continent into recession weighed on risk-taking sentiment, although lower valuations have incorporated this.

U.S. bonds fell back last week, as interest rates ticked upward, perhaps in keeping with the hawkish Fed minutes. However, high yield and bank loans fared positively on the better news for risk assets. Foreign bonds were strongly negative due to the strength in the dollar, in both developed and emerging markets.

Commodities fell back overall last week, as gains in agriculture were weighed down by declines in energy and metals. The price of crude oil fell back by -3% to just under $105/barrel. Rising concerns over the impact of a global recession on oil demand especially weighed on prices earlier in the week, with private estimates starting to vary widely (from as much as $140 in a bullish supply-shock scenario to as low as $65 under a demand-destroyed recession, for example). While lower prices decrease input costs for transportation and production of goods, and pull down inflation readings (both arguably good outcomes), they also threaten the strength of energy company profits and commodity strategy momentum. Unfortunately, you can’t have both.

Commodities had corrected by as much as -20% since a peak June 9, with rising recession fears appearing to surpass fears of continued high inflation for now—although tight supply conditions continue to plague a variety of goods, including energy, grains, and metals. Unfortunately, the natural gas situation in Europe has gone from bad to worse with the shutdown of the Nord Stream 1 pipeline from Russia, presumably for summer maintenance from Jul. 11-21, but there are worries about whether it will be turned back on again, for political reasons. Russia has already decreased flows, with Europe looking for way to fill gas storage facilities as much as possible. Roughly 40% of the EU’s gas comes from Russia, so the supply is critical to ensuring adequate summer cooling needs as well as enough supply to handle winter heating. In the worst case, rationing has been discussed as an option, which would prioritize energy flows to residential homes, but causing manufacturing activity to take a back seat—with obvious negative implications on economic activity.

Period ending 7/8/20221 Week (%)YTD (%)
DJIA0.82-12.84
S&P 5001.98-17.52
NASDAQ4.58-25.33
Russell 20002.43-20.66
MSCI-EAFE0.97-19.40
MSCI-EM0.94-17.50
Bloomberg U.S. Aggregate-0.87-10.59
U.S. Treasury Yields3 Mo.2 Yr.5 Yr.10 Yr.30 Yr.
12/31/20210.060.731.261.521.90
7/1/20221.732.842.882.883.11
7/8/20221.983.123.133.093.27

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

This entry was posted in Research. Bookmark the permalink.