Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank
The major U.S. equity markets posted solid gains for the week as well as the best monthly performance since 2020, as a potential shift away from very aggressive Federal Reserve rate hikes, despite the announcement of a second consecutive quarter of negative GDP in the U.S. For the week, the Dow Jones Industrial Average rose 3.0%, the S&P 500 increased by 4.3%, and the Nasdaq Composite ended the week 4.7% higher. Bond prices rallied last week, with the yield on the 10-year U.S. Treasury note declining to 2.66%, down 9 basis points for the week, as demand for safe-haven assets continued to rise. The yield curve remained inverted, with the yield on the two-year Treasury note at 2.89% exceeding that of the 10-year note. The price of West Texas Intermediate (WTI) crude oil rose to $98.39 per barrel on Friday, up 4.1% for the week. The U.S. dollar index was down 0.7%, a second-straight weekly decline after gaining in six of the past seven weeks. Gold finished the week up 3.1%.
The Federal Open Market Committee (FOMC) voted to raise the Fed Funds target rate by 75 basis points for the second meeting in a row, to a range of 2.25% to 2.50% and signaled "another unusually large increase could be appropriate" at the next meeting in September. In a statement by the Federal Reserve, it was noted that recent economic activity has softened. Additionally, the labor market remains strong with robust job gains in recent months and low unemployment. Further, inflation remained elevated with pandemic related imbalances, higher food and energy prices, and broader price pressures contributing to the pain. Fed Chair Jerome Powell in his press conference highlighted that a 50-75 basis point hike is expected at the Fed’s September meeting. Last week’s aggressive action by the Fed, in conjunction with Powell’s commentary, continues to signal that Fed officials will prospectively take action to curtail inflation while attempting to avoid derailing the economy. Fed Fund futures indicated nearly four additional 25 basis point Fed Fund increases by year-end 2022 (placing the Federal Funds rate at 3.25%-3.50%), a potentially much slower pace than the path already taken year-to-date.
The highly anticipated second-quarter U.S. GDP reading was announced last week coming in at -0.9% quarter-over-quarter annualized. This was the second quarter in a row of a negative GDP reading in the U.S., which many investors define as a definition of a recession. However, the official record-keeper of recessions in the U.S. is an independent committee known as the National Bureau of Economic Research (NBER). The NBER defines a recession more broadly, as "a significant decline in economic activity that is spread across the economy and lasts more than a few months." It monitors nonfarm payrolls, consumption, and industrial production. While these measures are softening, the labor market remains strong. The NBER has yet to officially declare a U.S. recession.
Investors will be keeping their eyes on the economic calendar as well as the continuation of earnings season in the week ahead. The government will release several key reports on jobs in the week to come that could have implications for the Fed’s next policy moves. U.S. ISM Manufacturing and Construction Spending will be announced on Monday. Tuesday brings the JOLTS report and U.S. Vehicle Sales. Wednesday follows with U.S. ISM Services, U.S. Factory Orders, and Retail Sales. The week ends with the all-important Nonfarm Payrolls report for July. The week ahead will also be packed with earnings. After Shell, Chevron, and ExxonMobil reported record profits driven by high oil prices last week, the energy sector could be a standout with more reports due from major oil companies. Other bellwether firms set to report earnings this week include HSBC, Activision Blizzard, Starbucks, Caterpillar, Marriott International, Uber Technologies, CVS Health, Honda Motor, and others.
As always, we will be watching and reporting to you next week. Thank you.