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.

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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