Weekly Market Commentary August 22nd to August 26th 2022
With no Federal Reserve meeting this month, markets were acutely aware of every phrase Fed Chairman Jerome Powell delivered during his Jackson Hole speech on Friday morning. Powell conveyed “hawkishness” on the Federal Reserve’s commitment to fight inflation throughout his comments. The following phrases highlighted the tone of the meeting: “use our tools forcefully”, “historical record cautions strongly against prematurely loosening policy” and “bring some pain to households and businesses”. A 75-bps hike continues to be a 2 to 1 favorite over a 50-bps hike in September while the markets are now anticipating less of a Fed pivot in early 2023.
Second quarter GDP was revised to -0.6% from -0.9% as the U.S. economy contracted at a more moderate pace than what was initially reported. Underlying indicators were even more favorable than the most optimistic estimates as consumer spending was revised higher to a 1.5% pace, up from the 1.0% economists previously thought. The highly volatile measure of inventories was the largest detractor during the quarter, only rising $83.9 billion after a $188.5 increase in the first quarter. Inventories alone subtracted 1.83% from GDP and are rarely negative for two consecutive quarters – a potentially positive catalyst for a rebound in the third quarter.
Pending Home Sales fell 1% in July, marking eight of nine months that the figure has fallen. Pending sales are off by nearly 20% in comparison to last year’s numbers as housing affordability remains under pressure. Elevated home prices and rising mortgage rates have increased new mortgage payments by 50% in comparison to a year ago. New Home Sales also confirm pressures within the housing market missing estimates with only 511k unit sales, a 13% decline from June and 30% from a year ago. Rising inventory levels may provide relief for first time homebuyers as a pullback in prices is expected.
Headline Personal Consumption Expenditures (PCE) fell month-over-month showing deceleration in July. Year-over-year numbers also came in lower than the previous month at 6.3% versus the 6.8% consumers saw in June. Both these data points should be an encouraging sign for the flight on inflation. However, Powell addressed the lower inflation readings with stern comments stating that they were a welcomed sign, but a single month’s improvement falls short of what the Fed is trying to accomplish. Core PCE, which excludes volatile food and energy prices, gained 0.1% in July and was up 4.6% over the past year.
Equity markets were little changed going into Friday but sold off into the weekend as Powell spoke during the final trading session. All three major indices sold off in unison with the Nasdaq leading the selloff down 4.4% to 12,142. The S&P 500 fell 4.0% on the week to 4,057 while the DOW decreased by 4.2% to 32,283. In the fixed income markets, the 10-Year U.S. Treasury yield finished above 3% at 3.3%.
Next week provides one key release, the all-important Nonfarm Payrolls report on Friday.