Economic Update 8-30-2022

• Economic data for the week included a slight upward revision in Q2 GDP, good results from consumer sentiment and jobless claims, little change in durable goods orders, while housing data continued to show weakness.

• Equity markets fell back in the U.S. and developed foreign markets, while emerging markets fared positively. Bonds pulled back due to higher interest rates across the yield curve. Commodities gained primarily due to higher prices for crude oil and grains.

U.S. stocks lost ground on net, with rising oil prices reigniting inflation concerns, unsurprising economic data, although late summer tends to feature lower volume than usual. The week ended with fears of interest rates remaining higher after Fed Chair Jerome Powell’s speech at the Jackson Hole gathering—in fact, the hawkishness of the comments caused an over -3% drop in financial markets. Every sector except energy (which gained 4%) lost ground last week, led by technology and communications. Real estate also fell back by -4% upon higher interest rates.

The Kansas City Fed’s annual Jackson Hole Economic Policy Symposium was highlighted by the well-anticipated speech by Chair Powell laying out the Fed’s future plans. (That forum has often served as a high-profile medium by the Fed for forward guidance, new initiatives, and other public messages.) The 10-minute speech focused on explaining the importance of the Fed acting strongly enough and for long enough to battle inflation, despite possible ‘pain’ it may cause, and noting that failing to act with the appropriate strength would be far more painful in the long run. Notable quotes included “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” as well as, “The historical record cautions strongly against prematurely loosening policy,” noting that any reversal to combat recession fears before inflation is contained could backfire. (This was no doubt aimed at fed funds futures markets, which had been pricing in a minor cut in 2023, after seeing rates peak around 3.50% at year-end. Now, expectations are for rates to reach the 3.75-4.00% range and hold steady.) In the meantime, Powell also noted that another 0.75% hike ‘could be appropriate,’ with fed funds futures continuing to point to that size of hike in Sept. by a 60/40 margin over a 0.50% hike. Other than the strength of the message, policy hasn’t changed.

Another well-discussed event of the week was President Biden’s announcement of partial student loan forgiveness, although this seemed to have minimal impact on financial markets or economic growth (with perhaps some marginal upward impact from cash flows being diverted from loan payments to consumption). Politically, the feedback was mixed, with estimates from several sources noting the ultimate budgetary impact being a wide range of $300 bil. to $1 tril.

Foreign stocks fell back along the same lines as U.S. equities, with concerns over central bank persistence in fighting inflation with higher rates. Europe fared worst, not helped by again-reduced Russian gas supplies over the Nord Stream pipeline, along with higher energy bills to consumers, as well as weaker manufacturing activity in the U.K. Emerging markets ended the week with a slight gain. Chinese equities fared positively, due to further announced government stimulus and cuts in several key interest rates, as did Brazil, due to tempered inflation readings.

U.S. bonds fell back a bit as interest rates rose last week, fueled by more hawkish central bank language. While investment-grade bonds were minimally changed, high yield bonds (with a higher correlation to stocks) fell back well over a percent. Foreign developed market bonds lost ground due to a stronger U.S. dollar, while emerging market debt was minimally changed.

Commodities gained across the board, with higher prices in grains, energy, and industrial metals, while precious metals lost ground slightly. The price of crude oil rose by 3% to $93/barrel, due to rumors of OPEC cutting output to sustain high prices. Wheat and corn prices gained, along with shifting expectations for production, due to the impact of North American drought predictions.

Period ending 8/26/2022	1 Week (%)	YTD (%)
DJIA	-4.20	-9.97
S&P 500	-4.02	-14.00
NASDAQ	-4.43	-21.99
Russell 2000	-2.93	-14.69
MSCI-EAFE	-1.91	-17.77
MSCI-EM	0.54	-16.46
Bloomberg U.S. Aggregate	-0.36	-10.02

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2021	0.06	0.73	1.26	1.52	1.90
8/19/2022	2.74	3.25	3.11	2.98	3.22
8/26/2022	2.89	3.37	3.20	3.04	3.21

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.