Weekly Market Report: August 19, 2022
Markets last week digested a relatively light economic calendar but ended the week on a downbeat with interest rates pressuring equity markets to finish in the red. An arguably overbought S&P 500 rejected the 200-DMA pretty squarely while developed (-3%) and emerging (-2.8%) international markets declined more than overall U.S. markets. Interest rates moved higher on the week, particularly out beyond three-year maturities, putting the 10 year UST just under the closely watched 3% level. Commodities were down slightly while the risk off tone and rise in U.S. rates to end the week resulted in a strong bid for the USD.
- A look at global central bank policy rates illustrates how synchronized the world is (tightening) but also how deeply negative central bank rates still are considering inflation (real policy rates).
- Softening inflation headlines have translated to easing overall financial conditions (stocks, credit spreads, weaker dollar) and market expectations of an easier Fed policy in 2023. Meanwhile, growth metrics (employment, GDP, PMIs) have held up relatively well.
- The strong July jobs report viewed along with trends in initial claims and wage pressures leaves us feeling a bit more caution as we look forward.
- Recent investor and fund manager survey data reflect some increasing optimism surrounding both equity markets and overall growth expectations.
- Acknowledging the bear market selloff was almost exclusively expressed in P/E multiple compression, an updated look at S&P 500 composition and valuations illustrates how quickly rally has brought the top-heavy composition/valuation concern back into play.
- The rising interest rate impact on housing is clear but a look at the high yield bond maturity wall illustrates potential refinancing issues don’t present themselves until 2025 and beyond. Expected twelve-month default rates have fallen from 8.1% to 5.2%.
- The Baker Hughes rig count data illustrates a production recovery from year ago levels with U.S. (+51%), Canada (+29%), and International (+11%) all increasing notably.
- With midterms approaching, political analysts are stepping up their forecasts with projections of a divided Congress and a plethora of Trump 2.0 storylines. Key takeaways are limited legislative pathways translating to ample executive agency and debt limit/shutdown debates.
Economic Release Highlights
- July MoM Retail Sales (0.0% vs 0.1%) were flat but the ex/vehicles (0.4% vs -0.1%) and ex/vehicles & gas (0.7% vs 0.3%) both handily exceeded expectations.
- July Existing Home Sales of 4.81mm was below the 4.85mm forecast and growth rates of -5.9% MoM and -20.2% YoY both declined notably versus prior month levels.
- August Housing Market Index collapsed in July to 49, far below the spot forecast of 55 and predicted range (53-58) for the month. • July Housing Starts (1.446mm vs 1.540mm) and Permits (1.674mm vs 1.650mm) missed and exceeded estimates accordingly.
- July Industrial Production (0.6%a vs 0.3%e) beat consensus as did the manufacturing output component (0.7%a vs 0.2%e).
- Regional Fed Philly (6.2 vs -5.0) and Empire State (-31.3 vs 5.0) Manufacturing Indices provided mixed readings on manufacturing activity for the month of July.