Tucker Financial Weekly Market Review: July 29, 2022

Weekly Market Report: July 29, 2022

Markets last week digested a highly anticipated FOMC meeting, a very busy economic calendar, and the busiest week of earnings reports for the Q2 reporting season. The net effect was a strong rally in risk assets with U.S. equity markets rising over 4% as well as non-U.S. developed (+3.7%) and emerging (+1.4%). Bond yields fell, mostly in the belly of the curve, leaving the 10yr UST yield at 2.67%. Commodities rallied over 4% with broad based gains across energy, grains, and metals while the USD weakened in sympathy with the risk-on tone of the markets.

Market Anecdotes

• Last week’s FOMC meeting delivered the expected 75bps rate hike, bringing rates from zero to the Fed median projection of “neutral” (2.25%-2.5%) in four months (ala Volker). The Fed also abandoned forward guidance and highlighted attempts to balance growth and inflation risks.
• Market reactions consisted of a risk asset rally, falling yields, and a tempering of future FOMC rate hikes. Markets see the terminal Fed Funds rate at 3.31% in January 2023, down notably from 4.06% in mid-June, and rate cuts beginning thereafter. The Fed has never stopped hiking before Fed Funds exceeded CPI.
• The tug of war between Wall Street (growth focus) and the Fed (inflation focus) will be the key determinant for risk assets and the economy looking forward.
• Inflation data is likely just beginning to moderate, but inflation expectations have moderated as TIPS break-evens, 5yr/5yr forwards, inflation swaps curve, and consumer survey data suggest.
• Over 35% of the S&P 500 reported earnings last week. Positive earnings surprises grew to net a blended Q2 growth rate of 6% with beat rates and margins of 73% and 3.1% respectively. Revenue is growing at 12.3% with beat rates and margins of 66% and 2.5%.
• Twisting yourself inside out to decide whether the U.S. is in recession? Q1 GDP of -1.6% followed by Q2 GDP of -0.9% viewed through a lens of the labor market, personal consumption, and the highly abnormal boom of pandemic recovery dynamics make the answer about as clear as mud.
• With the Fed owning over 30% of the treasury market and actively in QT mode, the slope of the U.S. Treasury yield curve has likely lost its efficacy as an indicator.
• Something in the energy markets of potential significant impact is the G7’s attempt to establish a global ‘buyers’ cartel’ to establish a price cap mechanism on Russian oil prior to the December 5th EU ban on insurance and services for vessels transporting Russian oil.
• A closer look at U.S. money supply might be one of the best explanatory variables for elevated U.S. inflation relative to the rest of the world.

Economic Release Highlights

• The June Personal Income & Outlays report revealed PCE inflation near consensus with headline readings of 1.0% vs 0.9% MoM and 6.8% vs 6.7% YoY and core readings of 0.6% vs 0.5% MoM and 4.8% vs 4.7% YoY.
• June Personal Income & Outlays showed personal income (0.6% vs 0.5%) and personal consumption expenditures (1.1% vs 0.9%) both increasing more than expected.
• Second quarter Employment Cost Index of QoQ 1.3% vs 1.1% and YoY 5.1% vs 4.6% registered higher than forecasts.
• U.S. 2Q GDP registered -0.9% for the second quarter, within the consensus estimate range of -1.1% to 1.5%.
• Euro area 2Q GDP accelerated from 0.5% q/q in Q1 to 0.7% q/q in Q2, significantly better than the 0.2% anticipated.
• The Conference Board’s Consumer Confidence Index for July came in near consensus at 95.7 versus 96.8.
• June New Home Sales of 590K were below consensus forecast of 664K and range of 620k-680k. Pending Home Sales (-8.6% vs -1.0%) missed notably to the downside.
• May Case-Shiller Home Price Index up 1.3% over the prior month, below both forecast of 1.6% and range of 1.5%-2.1%.
• June Durable Goods Orders surprised to the upside registering 1.9, well over consensus forecast of -0.5% and range of -2.5%-0.8%. Ex-Transportation (0.3% vs 0.2%) and Core Capital Goods (0.5% vs 0.2%) also beat to the upside.