Weekly Market Report: September 23, 2022

All eyes were on the FOMC decision and narrative last week with a relatively light economic calendar and sparse 2Q earnings announcements. Safe to say, the Fed delivered another dose of tough love, and it wasn’t very well received by risk markets as it was made clear the Fed is pretty comfortable with a policy induced recession. Thanks in large part to surging global interest rates, global equity markets traded down sharply with the S&P 500 touching a new bear market low, now -23.7% below the post Covid high. Developed international and emerging market equities traded sharply lower as well as U.S., German, and U.K. bond yields all marked new multi-year highs. Oil (-7.5%) dragged the commodity complex lower in sympathy with slowing global economic activity.

Market Anecdotes

• It was a difficult week with surging global bond yields and the ripple effect in what has been a historic bond market route and commensurate slide in equity markets where we’ve now endured three 10%+ downdrafts following the record high in early January.
• The surge in bond yields is historic no matter how you look at it. The 2y/10yr inversion exceeded 50bps last week – the deepest inversion we’ve seen since 1982 and a level commonly found in recessions (22% of the time) and always within 15 months of one.
• The FOMC delivered a third consecutive 75bps rate hike last week, taking rates to 3.0-3.25% and revised projections to another 125bps by year end with terminal rate expected to land at 4.5%-4.75%.
• In addition to median rate expectations detailed above, the SEP included downward revisions to forecasted economic growth and upward revisions to core inflation and unemployment.
• Synchronized tightening maintained its global theme last week with the U.S., BoE, Sweden, and Swiss central banks (among others) hiking rates while the BoJ again left rates unchanged. Accordingly, overall financial conditions have tightened meaningfully.
• USD strengthened 3.12% last week, wreaking havoc on FX markets including inducing Japan to engage in its first direct FX intervention since the 1990’s. The Euro is down 17% YTD and only three EM currencies (Mexico, Peru, Brazil) are up on the year with most down over 10%.
• The British Pound traded sharply lower on the announcement of a UK plan for the largest tax cuts since 1972, including the elimination of the top income tax bracket in a bid to stoke growth.
• Despite exceedingly tight global oil markets and ever-present geopolitical risk, oil has traded down in sympathy with concerns about falling global demand amid the economic slowdown.
• The Atlanta Fed GDPNow model which was firming in early August has deteriorated sharply in recent weeks with the latest Q3 U.S. GDP estimate at 0.3%.
• One consistently dovish monetary policy talk point is that while current inflation remains elevated, households seem to expect the Fed to succeed in bringing down inflation based on NY Fed, UofM and other household survey data.

Economic Release Highlights

• September U.S. PMI (C,M,S) of 49.3, 51.8, 49.2 measures improved meaningfully relative to August and beat consensus (47.0, 51.3, 45.0) across the board.
• September composite, services, and manufacturing PMI prints for September in the EU and UK were all in contractionary territory.
• The Conference Board LEI for August declined 0.3%, more than expectations for -0.1%, posting a sixth consecutive MoM decline.
• August Housing Starts (1.575M vs 1.440M) and Permits (1.517M vs 1.621M) came in above and below respectively, their consensus estimates. Existing Home Sales of 4.8M came in higher than forecasted (4.7M) but in a slowing trend with both MoM (-0.4%) and YoY (-19.9%) cooling off.
• September’s Housing Market Index registered a depressed 46 versus a consensus estimate of 48

Weekly Market Report: September 16, 2022

Markets last week had to digest a higher likelihood of a steadfast hawkish Fed in light of the economic calendar both here and abroad. Investors were again faced with little to no winners as equity markets and bond markets sank together, in what has been a clearly increasing pattern of rising rates/inflation anxiety corresponding to falling equity market prices. By the end of the week, the S&P 500 was within 5% of retesting the June lows and interest rates were at or above the June highs, depending on the term. The USD rallied in typical risk off/higher interest rate fashion while commodities broadly moved lower on the week.

Market Anecdotes

• A hot inflation reading on Tuesday may have reduced the odds of the Fed engineering a soft landing, offsetting increased soft landing odds stemming from last month’s employment report.

   

• That the aggressive pace of Fed rate hikes has markets on edge might be understandable given we’re looking at the fastest six-month pace of rate hikes since 1981, assuming 75bps this week.

   

• Futures markets have priced in an additional 50bps of rate hikes in recent days, to a terminal rate of 4.5% by April of 2023, which has been reflected in both economic forecasts and stock/bond market pricing as well.

   

• Happy endings have clearly not been the weekly trend in 2022 with more 1%+ down days ending the week than any year since 1952. This week was thanks in part to a very public warning of weakening earnings and slowing global growth from FedEx CEO Raj Subramaniam.

   

• A current look at market technicals shows the S&P 500’s rejection of the 200 daily moving average and subsequent breakdown toward the bear market low in June means the downtrend is still very much in place with markets again flirting with oversold technical conditions.

   

• Another look at positive stock and bond correlations and the resulting headwind to standard investment portfolios shows both shorter and longer term trends dramatically on the rise.

   

• Election cycles and mid-term predictions will now begin to ramp up warranting a look at which policy debates have market implications and requisite historical election cycle market patterns.

   

• Eurozone inflation is doing the ECB no favors as regional CPI marked record highs for eleven consecutive months.

Economic Release Highlights

• CPI for August reported MoM headline (0.1% vs -0.1%) and core (0.6% vs 0.3%) and YoY headline (8.3% vs 8.1%) and core (6.3% vs 6.1%). 
• The latest New York Fed Survey of Consumer Expectations show median 1yr, 3yr, and 5yr ahead inflation expectations falling 
• August Retail Sales increased 0.30% (vs expectations for -0.1%), a rebound from prior month’s -0.40% reading. 
• August’s NFIB Small Business Optimism Index improved to 91.8, slightly higher than expected (90.5) and a small improvement over the prior month (89.9). 
• UofM Consumer Sentiment improved from 58.2 in August to 59.5 in September. 
• Industrial Production in August softened 0.20%, a slowdown from prior month’s 0.50% growth.

Weekly Market Report: September 9, 2022

In a holiday shortened week, markets digested a large dose of FOMC speaking engagements, a very light economic calendar, and requisite geopolitical interference. The result was a pronounced rally across U.S. and developed non-U.S. equity markets with emerging markets ending flat to slightly down on the week. Interest rates continued their march higher with the yield curve moving up in parallel fashion leaving the 10yr UST at its highest level since the June 2022 bout of market volatility. The USD fell slightly on the risk rally and the commodity complex finished in the red with oil trading sideways but natural gas falling 9% on the week.

Market Anecdotes

• From an equity market technical perspective, it feels like the bears are in check until the June lows are taken out while the bulls are in check until the mid-August highs are taken out.
• It was a busy Fed speaking circuit last week with markets (perhaps foolishly) hoping for a second consecutive slowdown in CPI data taking the Fed hawkish narrative back a bit. The labor market and wage inflation may well just take the wheel for the hawkish narrative.
• Falling inflation data points are growing including Baltic Dry Index, Logistics Manager Index, WCI Shipping Rates, Warehousing/Transportation Pricing, ISM and regional Fed Delivery Times/Prices Paid/Prices Received, commodity prices, gas prices, vehicle prices, and rental prices.
• Fed whisperer Nick Timiraos published a WSJ article highlighting little pushback from FOMC members regarding expectations for a 75bps hike at the September FOMC meeting. Four minutes later, market probabilities for 75bps increased from 72% to 92%.
• Both the ECB and BoC announced 75bps hikes to their policy rates, larger than the 50bps consensus. The European rate now stands at 1.25%.
• Bond market carnage continued last week now with the Barclays Aggregate Index 1yr, 2yr, 3yr, and 5yr total returns all at the worst levels on record.
• The consensus case against imminent U.S. recession beyond pent up consumer demand (liquidity) and a robust job market is pent up capex where capital goods orders are near 1998 levels and the average age of fixed assets are at their ‘oldest’ since 1964.
• Lithium refineries, battery manufacturing plants, solar/wind power installs, and power grid investment are beginning in earnest in what is expected to total $1.2t in investment by 2035, spurred in part by the recently passed climate/infrastructure bill.
• Reuters reported this week that the U.S. Strategic Petroleum Reserve has fallen to its lowest level (442.5mb) since November 1984.
• The EU foreign policy chief and U.S. officials signaled a new Iran nuclear deal is not expected to happen anytime soon.
• An eventful (and somber) week in the UK saw the passing of Queen Elizabeth and the appointment of Liz Truss as the next Prime Minister.

Economic Release Highlights

• August ISM Services Index came in at 56.9 versus consensus forecast of 55.4, toward the higher end of consensus range of 53.5 to 57.0.
• Weekly initial jobless claims fell slightly WoW to 222k.

Weekly Market Report: September 2, 2022

Last week marked the unofficial end of summer, the beginning of a new school year, the end to a difficult August, and a lumpy opening for September. Markets digested the August jobs report and were forced to acknowledge the Fed’s resolve on inflation despite indications of a meaningful slowdown in the economic environment and what looks like the beginning of a slowdown in inflation data. Equity markets closed the week down over 3% with broad weakness across sectors. The yield curve was volatile at both ends of the curve leaving the 2yr/10yr still solidly in inverted territory (2y/10y) and rates higher across the curve. The 10yr closed the week up 16bps to 3.20%. Commodities fell sharply on slowing global growth concerns and we saw a +0.67% flight to quality rally in the USD.

Market Anecdotes

• After being way too dovish for way too long, the Fed seems intent on a path of the opposite extreme for the
  time being and markets are pricing in a corresponding economic contraction.
• The disconnect between market expectations and FOMC projections is being reconciled over the past couple of weeks. Strategas look at several macro indicators shows how conditions have clearly tightened over the past 45 days.
• Market technicals look mixed with the S&P 500 holding the 3,900-support level last week but Europe has already pushed itself back to June levels – suggesting U.S. markets may also revisit.
• Slowing global growth and the policy response to inflation have investors on edge. Percolating evidence of supply side and pandemic related disinflation may offer some glimmers of hope.
• The pain of rising interest rates is clear and translates to rising mortgage rates (30yr (5.66%), 15yr (4.98%), and 5/1 adjustable (4.51%)) exerting pressure on the housing market. Rates are also pressuring P/E multiples which sit near the midpoint of the range over the last ten years.
• Bloomberg noted some concern surrounding declining (but still record high) commercial bank deposits with the first QT ramp up set to begin in September – possibly a demand side technical concern but Bianco Research illustrated the case that there will be no selling of bonds/notes through 2024 at these levels.
• Last week in geopolitics saw the U.S. send two guided missile cruisers through the Taiwan Strait, a U.S. order to Nvidia and AMD to halt certain AI chip exports to Russia, China, and Hong Kong, hiccups in the Iran nuclear investigation, and Russia halting natural gas supply to Europe.
• The EU energy crisis with December and February sanctions looming has EU bound Russian gas being flared, the EU buying gas at any price, and a G7 agreement of a price cap on Russian oil.

Economic Release Highlights

• The August jobs report revealed 315,000 new jobs, just beyond the consensus forecast of 293,000 but the unemployment rate ticked 0.02% higher to 3.7%. The labor market participation also increased 0.02% to 62.4%.
• ISM Manufacturing Index for August stayed at 52.8, just above the spot consensus forecast of 52.0.
• The Case-Shiller Home Price Index rose 0.4%, less than the 1.1% consensus forecast.
• Consumer Confidence in August climbed to 103.2, ahead of the consensus estimate of 97.4 and above the high end of the range.
• The July JOLT survey showed 11.239mm job openings, well more than the consensus 10.4mm and above the high end of the range.

Weekly Market Report: August 26, 2022

Markets returned their focus to the macro backdrop last week and didn’t applaud what they saw and heard. We saw a relatively packed (and weak) economic calendar punctuated with the KC Fed Jackson Hole Economic Symposium where central bankers, academics, economists, and policy makers rubbed elbows and waxed poetic. By week’s end, U.S. equity markets had fallen between 3%-4% while emerging (+0.28%) and developed (-3%) international markets held up slightly better. Interest rates and the USD responded to hawkish Fed commentary with rates moving rates higher in the shorter maturities and an ensuing bid for the USD. Commodities rallied (+2.8%) with energy, grains, and metals strengthening across the board.

Market Anecdotes

• With all the hullabaloo, Bloomberg News made clear history’s suggestion that Jackson Hole speeches rarely mark a policy shift/turning point for the markets. That said, Powell and company certainly did a number last week. 
• The tenuous dance between the Fed and markets with slowing inflation readings pulling dovish market sentiment to levels the Fed seems determined to push back on for now. Market based monetary policy expectations shifted last week accordingly. 
• The ‘year of the 60/40 portfolio continues to deliver with both stock and bond markets both sitting over 10% in the red YTD and very little company from a misery loves company perspective. 
• After rejecting the 200dma last week, U.S. equity markets continued their retreat closing just above the 50 dma and feeling the pinch of higher rates and monetary policy headwinds. Deteriorating sentiment, however, should be viewed as a constructive contrarian indicator. 
• Fundamentals surrounding earnings and profit margins reinforce a note of caution with respect to the forward outlook and trends respectively. 
• Monday marked the first time in twenty years where a USD was worth more than a Euro. 
• Softness in the housing market from exuberant levels of late 2021 to early 2022 is apparent. Bianco Research examined several alternative measures also illustrative of both pricing trends and the technical backdrop. 
• A look at narrow market leadership and average correlations among stocks within the S&P 500 illustrate some of the primary headwinds for active managers in place since the GFC and era of central bank intervention policies. 
• China announced a $150bn stimulus package last week resulting in some positive momentum in emerging markets. Whether that’s material enough to matter remains the key question.

Economic Release Highlights

• July MoM PCE Inflation of headline (-0.1% vs 0.1%) and core (0.1% vs 0.3%) and YoY headline (6.3% vs 6.3%) and core (4.6% vs 4.7%) both came in slightly below estimates. 
• July Personal Income (0.2% vs 0.6%) and Personal Consumption Expenditures (0.1% vs 0.4%) both came in softer than expected. 
• August U.S. PMIs (C, M, S) continued to contract in August with readings of 45.0, 51.3, 44.1, all missing and coming in at or below the lowest end of consensus range. 
• August EZ PMIs (C, M, S) of 49.2, 49.7, 50.2 all came in slightly higher than consensus while Japan’s readings of 48.9, 51.0, 49.2 moved slightly lower versus the prior month. 
• July New Home Sales (511k) came in under consensus of 575k and below the low end of the range of forecasts. July Pending Home Sales of -1% was slightly better than -2.5% forecasted. 
• The final UofM Consumer Sentiment Index for August was revised notably higher to 58.2, well above the point estimate of 55.1 and range of 55.1–56.0. 
• July Durable Goods Orders (0.0% vs 0.5%) missed on the headline but beat on the ex-transportation (0.3% vs 0.1%) reading and core capital goods posted growth of 0.4%.

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. 

Market Anecdotes

• 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.

Weekly Market Report: August 12, 2022

Markets responded positively to an inflation superfecta last week with the economic calendar delivering four cooler than expected inflation reads, a stark contrast to a long string of inflation data points coming in hotter than expected. U.S. equity markets rose over 3% for the week putting the bounce off the June 17th low at 16.5% and sitting at a 50% retracement of the sharp 2022 decline experienced in the first half. Interest rates didn’t move meaningfully last week, likely looking at the Fed more so than the week’s inflation readings. Commodities were up broadly with WTI oil closing back above $90 and increases across grains and industrial metals as well. The USD continued on its weakening trend since mid-July, down 0.93% for the week.

Market Anecdotes

• In a very rare occurrence, all the news related to inflation last week was positive (lower than expected) including July’s CPI, NY Fed Survey of Consumer Expectations, PPI, and Import Prices. 
• Given inflation drives Fed policy and Fed policy informs the economy and risk assets in general, a close look and monitoring of specific inflation drivers feels important. Doing so makes clear the importance of shelter, food, energy, and wages that seep into most components. 
• Four Fed officials took to the podium last week stressing the fact that inflation is nowhere near FOMC target levels and there is much left to be seen. Futures markets are pricing a peak rate of 3.50%-3.75% from February to May 2023 followed by cuts in the second half of 2023. 
• Not to be dismissed are three formidable moats around the U.S. economy including excessive job openings, pent up demand, and credible Fed policy which may well work to insulate the U.S. economy for the next several months. 
• We’re nearing the unofficial end of earnings season (WMT Tues) with more of a limp than a couple weeks ago. Blended S&P 500 earnings growth of 6.7% with top-line revenue growing at a robust 12.5%. 
• We’ve highlighted the downbeat sentiment consumers, investors, and small businesses have had for several months now. Renewed Wall Street strategist predictions adds them to the same list. 
• Housing market dynamics, weak domestic demand, a contraction in exports, and persistent zero covid public health policies are seemingly limiting the modest stimulus measures undertaken in China, leaving strategists with an underwhelming outlook for Chinese equity markets.
• In a cheery report last week, BCA’s Geopolitical team suggested the odds of WWIII could rise close to 20% over the next two years.

Economic Release Highlights

• Headline and core July CPI data of 8.5% YoY / 0.0% MoM and 5.9% YoY / 0.3% MoM all came in exactly 0.2% lower than consensus forecast and at or below the low end of the range. 
• The July Producer Price Index surprised to the downside with both MoM (-0.5% vs 0.3%) and YoY (9.8% vs 10.3%) readings coming in below consensus expectations. 
• UofM Consumer Sentiment for August beat consensus expectations, registering 55.1 versus forecasts for 52.2. 
• The July NFIB Small Business Optimism Index came in just above consensus at 89.9 versus forecast of 89.2 and up slightly over the prior month. 
• Mortgage purchase applications fell 1.4% last week following a 1% increase the prior, leaving applications at the lowest level since April 2020 and down 18.5% versus last August.

Weekly Market Report: August 5, 2022

Markets last week continued to digest a heavy slate of corporate earnings and a modest economic calendar punctuated with the July jobs report on Friday. What had been another good week was met with some policy anxiety in response to Friday’s extremely strong jobs report which implied the Fed has more work to do to tame inflation and a hot job market. U.S. equity markets managed to finish up for the week with technology and small caps setting the pace while developed international markets lagged. Interest rates moved sharply higher, in response to increased likelihood of a more hawkish FOMC, with shorter 1yr-5yr rates all increasing nearly 30bps. Commodities fell 6% on the back of a sharp decline in oil prices (-9.74%) to close below $90.

Market Anecdotes

• The move higher in interest rates last week poses a threat to one of the biggest drivers of positive equity market returns we experienced in July. Falling interest rates last month also contributed greatly to the recent decline in the USD. 
• Interesting anecdote on the impact of P/E multiple compression on the Russell indices is that the R1000 Value now includes prior growthy names such as Netflix and Facebook while the R1000 Growth included Coca Cola and Procter & Gamble. 
• Market reaction to the overwhelmingly robust July jobs report can be categorized as ‘good news is bad news’ with futures pricing in a more aggressive tightening path and a higher terminal rate. 
• Inflation data for July and August will ultimately determine the Fed’s path and decision in September but the robust labor market certainly gives them some cushion. 
• Global inflation has yet to abate but falling commodity prices (including oil) are providing some hope. Oil’s notable break to the downside is clear but Russia/Ukraine, China zero Covid, and global growth combined translate to extreme levels of uncertainty. 
• Gas prices have fallen for over 50 consecutive days and $1.00 from the peak, now around $4.11 per gallon with some areas of the country actually seeing a two handle on a gallon 
• How much growth will have to recede to achieve lower inflation is the million-dollar question to which nobody has the answer. Albeit a notably different inflation backdrop, a look at the early 1980’s does little to inspire confidence. 
• Over 800 companies have reported 2Q earnings thus far with decent beat rates and underwhelming beat magnitudes. Upward guidance has fallen from 20% to 10% over the past few quarters but 10% is still an impressive number. S&P 500 earnings and revenue growth sit at 6.7% and 13.6%. 
• The BCA bull contingency noted the strong possibility of 2Q GDP being revised to positive growth in addition to noting Q1 real GDI increased 1.8% in the first quarter. 
• Renmac noted Italy’s fundamental fiscal unsustainability for which the ECB TIP can only buy time. Substantial fiscal reform and/or debt restructuring seem increasingly likely at some point.

Economic Release Highlights

• July’s Employment Situation reported new jobs of 528,000 far exceeding consensus of 250,000, taking the unemployment rate down one tick to 3.5%. 
• Labor market participation fell one tick to 62.1% and average hourly earnings came in higher than consensus with growth rates MoM (0.5% vs 0.3%) and YoY (5.2% vs 5.0%). 
• The June JOLT Survey revealed 10.698mm job openings, fewer than the 11.0mm forecasted and well below the 11.303mm openings in May. 
• The July ISM Manufacturing Index registered 52.8, slightly higher than the consensus forecast of 52.2. 
• The July ISM Services Index came in at a robust 56.7, well above consensus of 53.0 and higher than the high end of the forecasted range.

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.
  

Weekly Market Report: July 22, 2022

Last week we saw increasing economic concerns both domestically and abroad and a relatively downbeat earnings calendar met by a strong move higher in global risk markets, keeping in line with the market’s tendency to look beyond today’s headlines. While we don’t think we are out of the woods just yet, U.S. equities did cross through some key technical thresholds on their way to solid 2.55% gains, now sitting 7.8% above the June 17 lows, while developed international (+3.25%) and emerging international (+2.05%) both posted strong gains as well. Oil fell back below $95bbl while industrial metals posted gains netting a 0.75% gain for composite commodity markets. Interest rates continued to fall, particularly in the belly of the curve leaving the 10yr at 2.77%.

Market Anecdotes

• Last week the S&P 500 and Nasdaq both managed to break back above their 50-day moving averages which had been the longest sub-50-dma for the S&P 500 since the 2008 Financial Crisis. 
• 21% of the S&P 500 has reported 2Q earnings with blended bottom- and top-line growth of 4.8% and 10.9% respectively. Beat rates and beat margins are both below their 5-year averages with both unusually high 2Q 2021 comparisons and slowing macro environment contributing. 
• A bear market and looming potential recession has pressed S&P 500 valuations from a record highs of 27.2x down to 17x, much closer to its historical average. 
• Renmac noted that overdone negative investor sentiment, including the recent BoA/ML Fund Manager Survey, has been one of the more consistent rally indicators during the bear market which was on display again last week. 
• With the FOMC meeting this week, Bianco Research noted the Fed has never stopped hiking rates until the funds rate exceeded CPI and given the current respective levels of 1.75% and 8.60%, we have quite a gap to close. 
• The ECB began its first rate tightening cycle in eleven years last week with a 50bps hike while the BoJ maintained their ultra-loose -0.10% reference rate, reiterated its pledge to continue to be a buyer of 10yr JGBs at a yield of 0.25%, and reinforced its dovish forward guidance.
• While the 10yr UST yield has fallen from mid-June level of 3.49% to 2.77% last week, mortgage rates too peaked above 6% and have stabilized around 5.75%.
• Interestingly, high yield bond spreads have fallen from recent highs of 5.99% on July 5th back below 5% last week, implying a 12-month spread implied default rate of 6.65% – notably below normal recessionary default rates of 8%. 
• While the FAO food price index has decelerated for the past three months, it was up 23.1% in June – why we welcome a Russia/Ukraine deal signed last week lifting the Black Sea blockade of Ukrainian grain (and fertilizer) exports and allow Russia to resume grain exports as well.
• Thankfully, Europe’s Nord Stream 1 pipeline resumed flows of natural gas last week.
• In what will no doubt be a movie one day, it became public last week that an ex-Coinbase employee (Ishan Wahi) was caught frontrunning token issuance and arrested attempting to flee the country to India.

Economic Release Highlights

• U.S. flash PMIs for July fell from 52.3 to 47.5 with more weakness across the service sector than anticipated and manufacturing easing 0.4 to 52.3. 
• The June Conference Board LEI fell by 0.8% after a 0.4% decline in May. 
• Eurozone flash PMIs for July dropped from 52.0 last month to 49.4, now in contractionary territory with June Housing Starts (1.559M vs 1.588M) and Permits (1.685M vs 1.666M) both came in at consensus expectations. 
• June Existing Home Sales of 5.12M came in under consensus estimate of 5.395M and under the low-end consensus range of 5.15M to 5.5M. 
• The July Housing Market Index again fell short of consensus expectations, registering 55 versus consensus forecast of 66. 
• Eurozone CPI for June rose 0.81% MoM and 8.65% YoY.