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.

This communication is provided for informational purposes only and is not an offer, recommendation or solicitation to buy or sell any security or other investment. This communication does not constitute, nor should it be regarded as, investment research or a research report, a securities or investment recommendation, nor does it provide information reasonably sufficient upon which to base an investment decision. Additional analysis of your or your client’s specific parameters would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any client or portfolio and is not presented as suitable to any other particular client or portfolio.
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