Equities continued to push higher with investors considering signs that inflation may have peaked and economic growth may be slowing. Most major equity markets added to the gains of the previous week. Despite falling oil prices, losing 3% in the week, the TSX managed to finish the week 3.1% higher. As did the commodity sector, more defensive shares in healthcare and utilities lagged, with consumer discretionary performing the best of S&P 500 sectors.
Since the peak, inflationary pressure from commodities has subsided, at least for the moment. Oil finished the week falling over 20% from the recent high, and copper and lumber prices have fallen 32% and 60%, respectively. An UN-supported agreement between Russia and Ukraine permitting grain exports gave some relief to agricultural commodities. Wheat, corn, soybeans, and soybean meal are also significantly down from their recent highs.
The data calendar for the week started with the National Association of Home Builders’ monthly confidence index diving 12 points to 55 in July, much larger than expected in a poll by the Wall Street Journal of economists forecasting a 66 reading. Three readings in the overall index, current sales (falling 12 points), traffic of prospective buyers (down 11 points), and sales expectations (dropping 11 points), all contributed to the second most significant decline in the history of the index. The Mortgage Bankers’ Association also reported mortgage applications falling 1.7% on July 8. This is the second week in a row that applications have fallen, with a 30-year fixed rate mortgage topping 5.51%. Rising rates, production bottlenecks, and land and financing costs are contributing to slowing home construction.1 On Tuesday, the Commerce Department reported that US home starts fell 2% in June to 1.56 million, with the annual rate dropping 6.3% from last year. Building permits were also softer coming 0.6% lower in June.2 On Wednesday, the National Association of Realtors reported that existing home sales fell 5.4% in May and 14.2% from a year ago. Median existing home sales prices jumped 13.4% from one year ago to $416,000, and unsold inventory rose to a 3-month supply at the current sales rate.3
On Thursday, the Labor Department’s initial jobless claims reported an increase of 7,000 from the previous week to 251,000. Benefits paid from all programs fell 47,842 from the last week to 1,353,028.4 On Thursday, the Philadelphia Federal Reserve reported their gauge of regional business activity plunged to a negative 12.3 in July from the June reading of a negative 3.3. A reading below zero indicates deteriorating business conditions; this is the second month for the reading in negative territory. US manufacturing is recently under some pressure; however, it should be remembered that last week the New York Fed released the Empire State survey showing improving business conditions.5 Also, on Thursday, the Conference Board released the latest Leading Economic Index showing a decrease of 0.8% in June. The LEI was down 1.8% in the first half of 2022 after a reading of 3.3 in the second half of 2021.6 The latest reading indicates that economic activity continues to slow, giving some hope that the Fed will slow rate hikes as the economy cools and inflation slows.
While equities and bonds have bounced off the latest bottom, rough waters are still ahead. Earnings season is in full swing, and the results are reasonably positive so far. However, guidance generally indicates a slowing second half of the year, and volatility in the first half will likely continue in the year’s second half.
Sources:
2 https://www.census.gov/construction/nrc/pdf/newresconst.pdf
3 https://www.nar.realtor/newsroom/existing-home-sales-slid-5-4-in-june
4 https://www.dol.gov/ui/data.pdf
6 https://www.conference-board.org/topics/us-leading-indicators
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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