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Weekly Market Update, July 18, 2022

GENERAL MARKET NEWS

Last Wednesday, U.S. inflation numbers for the month of June were released and the Consumer Price Index (CPI) report exceeded expectations with an increase of 9.1 percent year-over-year. This upside surprise in prices is keeping the Federal Reserve (Fed) on its toes in advance of its July 26–27 meeting; some market participants are expecting the Federal Open Market Committee (FOMC) to increase rates by a full percentage point, while other Fed officials are trying to reign in those expectations. Fed Governor Christopher Waller currently believes a 75 basis point (bp) hike is the right move. “You don’t want to overdo the rate hikes. A 75 [bps] hike, folks, is huge,” Waller explained. “Don’t think because you’re not going 100, you’re not doing your job.” Waller didn’t rule out a 100 bps increase if last month’s remaining economic data announcements point him down that path, but that is yet to be seen. This week will bring numerous data releases related to housing, a significant component of inflation, so there is still much that could develop prior to next week’s Fed meeting. U.S. Treasury yields were down modestly last week; the 2-year, 5-year, 10- year, and 30-year fell 1 bp (to 3.10 percent), 9 bps (to 3.04 percent), 15 bps (to 2.93 percent), and 16 bps (to 3.09 percent), respectively.

Markets sold off slightly last week as a higher-than-expected inflation report led to uncertainty around Fed policy. Wednesday’s CPI data came in with a 1.3 percent month- over-month increase against expectations for 1.1 percent. Energy, autos, airfares, and shelter drove the index higher. Following the report, expectations for a more rapid 100 bps federal funds rate hike increased dramatically. These expectations climbed near 90 percent at one point before St. Louis Fed President James Bullard—who is known as the most hawkish FOMC member— stated that he does not feel strongly for one at the upcoming meeting. As a result, stocks and growth (particularly technology, health care, and consumer discretionary) rallied on Friday. This performance was mixed with consumer staples, utilities, and tech as the three top-performing sectors for the week. Communication services, energy, and materials lagged as the President’s trip to Saudi Arabia led to speculation around higher production from OPEC countries.

On Wednesday, the June Consumer Price Index report was released. Consumer prices increased more than expected, with headline prices rising 1.3 percent against calls for a 1.1 percent increase. On a year- over-year basis, headline consumer prices increased 9.1 percent, up from 8.6 percent in May and above economist estimates for an 8.8 percent increase. That’s the highest level of year-over-year consumer inflation in 41 years. Core consumer prices, which strip out the impact of volatile food and energy prices, increased 0.7 percent during the month and 5.9 percent year-over-year against forecasts for 0.5 percent and 5.7 percent increases, respectively. Despite the larger-than- expected increase in core consumer prices, this represents a modest slowdown in year- over-year core consumer inflation after a 6 percent increase in May.

On Thursday, the June Producer Price Index report showed that producer prices increased more than expected, rising 1.1 percent in the month and 11.3 percent year-over-year against calls for 0.8 percent and 10.7 percent gains, respectively. Core producer prices, which strip out volatile food and energy prices, increased 0.4 percent in June and 8.2 percent year-over-year. Producer inflation has been driven by supply chain issues and rising material and labor costs this year, and the report showed that these headwinds continued to affect prices in June. Given still-high levels of consumer and producer inflation in June, the Fed is expected to spend the year tightening monetary policy to try to slow economic expansion and combat rising price pressure.

On Friday, the June retail sales report was released. Retail sales increased more than expected, with headline sales increasing 1 percent against forecasts for a 0.9 percent increase. This was an encouraging rebound for retail sales growth after a 0.3 percent drop in sales in May, indicating that the slowdown was temporary rather than the start of a sustained slowdown. Core retail sales, which exclude auto and gas sales, increased 0.7 percent, up from the 0.1 percent drop in May and well above economist estimates for a 0.1 percent increase. Consumer spending held up well during the first half of the year despite headwinds created by inflation, stock market sell-offs, and worsening consumer sentiment, which is an encouraging sign that consumers remain willing and able to go out and spend.

WHAT TO LOOK FORWARD TO

On Tuesday, the June housing starts and building permits reports are set to be released. These measures of new home construction are expected to be mixed, with permits expected to decline 0.9 percent and starts anticipated to increase 3 percent. These reports, which can be volatile on a month-to-month basis, are expected to come in well above pre-pandemic levels. Housing has been one of the best performing sectors since initial lockdowns ended in 2020, but the industry has begun showing signs of a slowdown this year, driven in large part by rising mortgage rates and a limited supply of homes for sale. If we see an increase in new home construction during the month, it would be an encouraging sign that home builders continued to break ground on new units, which, in turn, would help the supply-constrained market.

Wednesday will see the release of the June existing home sales report. Sales of existing homes are set to decline 0.2 percent after a 3.4 percent decline in May. On an annualized basis, sales of existing homes are set to fall to 5.4 million, down notably from the recent high of 6.5 million sales in January. Rising mortgage rates, a lack of supply of homes for sale, and rising prices have contributed to the slowdown in existing home sales growth. If estimates hold, it would mark the lowest level of existing home sales since the expiration of initial lockdowns, leaving sales near their pre- pandemic level. Given the fact that housing costs represent a large portion of consumer spending, the slowdown in sales growth may help slow home price appreciation and consumer inflation in the second half of the year.

Equity IndexWeek-to- DateMonth-to- DateYear-to-Date12-Month
S&P 500–0.91%2.12%–18.27%–9.41%
Nasdaq Composite–1.57%3.86%–26.50%–20.06%
DJIA–0.16%1.71%–12.97%–8.03%
MSCI EAFE–1.75%–1.55%–20.81%–18.99%
MSCI Emerging Markets–3.69%–3.54%–20.54%–26.24%
Russell 2000–1.40%2.17%–21.76%–18.39%
Source: Bloomberg
Fixed Income IndexMonth-to- DateYear-to-Date12-Month
U.S. Broad Market0.62%–9.80%–10.35%
U.S. Treasury0.28%–8.88%–9.45%
U.S. Mortgages0.82%–8.03%–8.56%
Municipal Bond1.46%–7.65%–7.88%
Source: Morningstar Direct

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed- rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg US Municipal Index includes investment-grade, tax-exempt, and fixed- rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.

Authored by the Investment Research team at Commonwealth Financial Network.

© 2022 Commonwealth Financial Network®

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