LSA Connect

Economic Update 8-22-2022

• Economic data for the week included strength in industrial production, little change in retail sales, and mixed results from several regional manufacturing surveys. Housing data also continued a string of weak monthly reports.

• Stock markets fell back globally, with U.S. equities faring a bit better than Europe and Asia, and inflation remaining top of mind. Bonds fell back due to rising interest rates across the yield curve, with foreign bonds negatively affected by a continued strong U.S. dollar. Commodities fell back broadly, with the exception of natural gas, buoyed by hot weather and geopolitical constraints.

Economic Update 8-15-2022

• Economic data for the week included consumer price inflation coming in little changed on the headline side, while producer price inflation declined on a headline level. Consumer sentiment improved more than expected.

• Global equity markets rose sharply last week, as slowed inflation results led to positive sentiment. Bonds fared positively, with little change in rates, but tighter credit spreads. Commodities gained across the board, helped by a weaker dollar.

After a lackluster start to the week, U.S. stocks were up sharply on Wed. onward after the monthly CPI report showed a flattening in headline prices, and core CPI not getting significantly worse. The search by markets for an inflation peak translates directly to the path the Fed may take in upcoming meetings, such as whether the Sept. FOMC rate hike will be 0.75%, 0.50% (consensus base case), or 0.25%. From a technical standpoint, markets have upwardly retraced almost 50% of the early 2022 decline, which has generated more bullish sentiment. For the chartists out there, a key question has been whether an upward ‘breakout’ continues to take hold from this point. Every sector gained ground last week, led by energy, materials, and financials, all gaining over 5%. Defensive sectors consumer staples and health care lagged with gains under 2%. Real estate rose over 4% on the week as well.

The Federal Reserve Open Market Committee raised the fed funds rate today by another 0.75%, to a new range of 2.25-2.50%. The vote was unanimous, with no dissents, unlike June’s meeting.

The formal statement language changed little, but noted ‘recent indicators of spending and production have softened’. However, job markets were still described as ‘robust’, and inflation remains ‘elevated’. The war in Ukraine was again acknowledged for the negative influence on inflation and global economic activity.

In the days prior, the CME fed funds futures market¹ signaled the probability of a 0.75% hike at around 75%, and of a more extreme 1.00% hike at 25%—so it wasn’t quite a done deal. The chances of a larger hike had gained steam in recent weeks, with sky-high inflation data pressuring the Fed towards a more hawkish pace, as hinted at by some Fed members during their rounds of carefully-worded speeches. However, drops in consumer inflation expectations and petroleum prices eased that pressure a bit. For the rest of 2022, embedded assumptions still include a 0.50% hike in September, followed by 0.25% each in November and December. This results in a year-end futures market estimate of around 3.50%, in what appears to be the high (aka ‘terminal rate’) for this cycle. The furthest-out available estimate, July 2023, has actually fallen to around 3.25%—implying a rate pause or cut early next year, presumably in response to recession and policy reversal. As usual, the press conference and upcoming speech circuit will be used for setting the tone on how policy will be handled over the next few quarters, although they remain data dependent.

Economic Update 7-25-2022

• Economic data for the week included weakness in housing markets—seen in disappointing results for existing home sales, housing starts, and homebuilder sentiment. The index of leading indicators continued a string of monthly declines, and jobless claims rose.

• Global equities experienced gains again last week, with foreign markets leading U.S. Bonds fared positively as well, as long-term interest rates tempered, and foreign debt was helped by a weaker dollar. Commodities were mixed with metals recovering, but grains prices falling with higher expected imports from war-torn Ukraine.

Economic Update 7-19-2022

• Economic data for the week included both producer and consumer inflation coming in higher than expectations, and continuing the string of multi-decade highs, which have weighed on business and consumer sentiment. Jobless claims also ticked up again, off of cyclical lows. Retail sales also came in stronger than expected, as did consumer sentiment (with lower long-term inflation expectations).

• Global equity markets were down on net for the week, with mixed reactions to economic and inflation data. U.S. bonds gained ground as yields fell back and the treasury curve inverted; foreign bonds were held back by a strong U.S. dollar. Commodities fell back due to continued recession concerns.

• Economic data for the week included U.S. GDP for the first quarter being revised down slightly, while personal income and spending have remained relatively strong. Durable goods and home prices also showed higher readings, the ISM manufacturing survey showed expansion but at a lower rate, while consumer sentiment has continued to deteriorate.

• Global equity markets declined again, ending a poor quarter, due to ongoing fears of a potential central bank-fueled recession. Bonds, however, fared positively in the U.S. as interest rates fell back from highs. Commodities declined, as economic slowdown fears have caused a pullback in prices for metals and grain supplies have moved higher.