July 30, 2022

Weekly Market Commentary July 25th to July 29th 2022

It was a very robust and telling week of economic data releases and if you go by economic textbooks, we are officially in a recession. Second quarter GDP was released Friday and it came in at -0.9% which marks two quarters in a row in which the US economy contracted. Why then, do so many economists not believe our fate has been sealed? Let’s not only look at other releases this week, but let’s dig a little deeper and look at other economic fundamentals which may paint a different picture.

For starters, the housing market is definitely cooling, mainly due to rising interest rates. We saw New Home Sales for June plummet 8.10% early in the week followed by a similar drop in Pending Home Sales a day later. With the Fed continuing to boost interest rates (see Wednesday’s 75 bps short-term rate increase) to fight inflation, combined with dropping oil prices over the past few weeks, this may be exactly the cooling we need to fight higher overall prices while trying to avoid the dreaded hard landing.

On the inflation front, we saw Personal Income and Spending both beat estimates (coming in at +0.6% and +1.1% respectively) but those gains get neutralized when the month-over-month Personal Consumption Expenditures (PCE) Deflator of +1.0% is figured in. To put it simply, yes income and spending were strong, but inflation was even stronger.

Softer measures of consumer confidence didn’t exactly surprise this week, but they did keep up the trend of falling expectations. The Conference Board Consumer Confidence Index came in at 95.7 compared to last month’s 98.4 and 2021 year-end figure of 115.2; while the University of Michigan Consumer Sentiment Index came in at 51.5 (it was in the mid-80’s at this time last year). Both results clearly show the consumer’s concern with the direction of the economy and could potentially translate into less spending and therefore, lower inflation.

Lastly, we’ll talk about the employment situation and how it ties into whether or not we are now in a recession. Recessions are declared by the National Bureau of Economic Research and are usually not made until well after one has occurred. Besides two quarters of negative GDP growth, a classic recession is usually marked by rising unemployment and widespread economic malaise. Although signs are present that we may be headed to a recession, we don’t have those conditions at the moment so the question of whether or not we are in one currently is very difficult to answer. The employment situation is still very strong with an unemployment rate of 3.6% and over 2.7 million jobs created since the start of the year. A key statistic to pay attention to is the Weekly Initial Jobless Claims which has recently shown a slight upward trend and will be the first sign that companies are feeling enough pain to begin layoffs. Most economists agree that weakening employment will need to be evident to truly declare a recession. So watch those Weekly Jobless Claims. This week’s claims came in at 256,000 which is only slightly higher than the 2022 average.

In the financial markets, equities rallied across the board as investors applauded the Fed’s aggressive stance on inflation. The S&P 500 finished the week at 4,130 or up 4.2%. The Dow Jones Industrials Average closed out the week at 32,845, up 3.0%. Finally, the tech-heavy NASDAQ was up 4.7% this week to close at 12,391. In fixed income markets, bonds also rallied as yields were down all the way across the board except for the 30-year. The 2-Year ended at 2.89%, the 10-Year at 2.66%, and the 30-Year finished at 3.03%. The yield curve remains inverted which is yet another sign of economic turmoil ahead.

Next week look for the July employment report, the ISM Services and Manufacturing Indices, Initial and Continuing Jobless Claims, Construction Spending, and Factory Orders.

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