Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank
US equities were lower last week, with the major averages posting a fifth decline in the past six weeks. Concerns about recession risks rose after the Federal Reserve hiked interest rates by 75 basis points to curb inflation. For the week, the Dow Jones Industrial Average declined by 4.0%, the S&P 500 decreased by 4.7%, and the Nasdaq Composite ended the week 5.1% lower. U.S. Treasuries were sharply weaker on economic growth and recession concerns. The 10-year U.S. Treasury finished the week at 3.68%, its highest level in a decade. The inversion of the yield curve deepened, as the yield on the two-year note rose to 4.20%, in a sign of growing pessimism regarding the near-term health of the economy. The price of West Texas Intermediate (WTI) crude oil fell to $79.39 per barrel on Friday, down 6.7% for the week, and back at pre-Russian invasion of Ukraine levels, as global recession fears and a stronger dollar rattled global energy markets. The U.S. dollar index saw the biggest weekly rally since March 2020 and hit fresh 20-year highs. Gold ended the week down 1.8%
The Federal Reserve (Fed) announced its latest monetary policy decision last Wednesday. The Federal Open Market Committee (FOMC) voted to raise the Fed Funds target rate by 75 basis points for the third meeting in a row, to a range of 3.00% to 3.25% and signaled further increase could be appropriate at the next meeting in November. Fed Chair Jerome Powell in his press conference reiterated that the FOMC will continue to raise rates "… until the job is done" by noting policies that are "… sufficiently restrictive to return inflation to 2%." The aggressive action by the Fed, in conjunction with Powell’s commentary, continues to signal that policy will need to be nimble and adaptable based on key economic figures and an environment struck with persistent inflation. Fed officials will take action to curtail inflation while attempting to avoid derailing the economic expansion. Fed Fund futures indicated four-to-five additional 25 basis point Fed Fund increases by year-end 2022 (placing the Federal Funds rate at 4.00%-4.25% or 4.25%-4.50%).
The primary question for investors is whether inflation can ease before the economy falls into a recession. Many components of inflation are set to improve, but there is stickiness in the housing component that will prove a challenge. Wage inflation is still too high, but rising labor force participation is helping ease those pressures, and the acceptance of the demographic labor shortage is motivating the business community to change hiring practices in ways that will ultimately ease wage pressures. While there is still a path to a soft landing, areas of rising concern are the deterioration of global economic conditions spilling into the U.S. and other pandemic-related changes are negatively impacting productivity growth, implying that wage inflation can’t be offset by productivity. The next few months of data will be crucial in determining which path the economy takes.
Investors can expect several key economic updates in the week ahead. On Tuesday, the latest reports on the housing market will become available, with the release of August new home sales and the S&P Case-Shiller Home Price Index for July. The Conference Board’s Consumer Confidence Index and the University of Michigan’s Consumer Sentiment Index will offer updates on consumer sentiment. On Thursday, the Bureau of Economic Analysis (BEA) will release its final estimate for second quarter GDP growth. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, will arrive on Friday. Finally, earnings season continues with Nike, Micron Technology, Carnival Corporation, and Bed Bath & Beyond will be among companies reporting earnings.
As always, we will be watching and reporting to you next week. Thank you.