Equity markets continued to be hammered over the last week, as the Fed surprised market pundits with its 75-basis point move in the Federal funds rate following Wednesday’s FOMC meeting. Chairman Powell, in the press conference following the conclusion of the meeting, reiterated that the “Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run”. In addition, he stated, “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.” 1
Fears that aggressive rate increases could push the economy into a recession caused volatility to soar, sending the S&P into the worst weekly decline since March 2020. Except for the Dow, all major equity indices in the US entered bear market territory. The TSX remains the best-performing index in North America, holding up on the back of the energy sector, which came under pressure in the week. While oil tumbled 9.80% in the week, the TSX dropped 6.50%, and year-to-date is down 10.6%. The Dow Jones fell 4.79% and is down 17.75% year-to-date. The S&P 500 declined 5.79% in the week and is down 22.90% year-to-date in bear market territory. The Nasdaq lost 4.78% in the week; year-to-date, it is the worst-performing North American index, falling 30.98%. The S&P 400 Midcap index and the Russell 2000 index fell over 7% and are down over 20% year-to-date.
Equity indices in Europe struggled after several central banks announced rate increases causing investors to worry about stalling economic growth. Except for Italy’s FTSE MIB Index losing 3.36%, the remaining significant indices of Europe and the UK all fell over 4%.
Economic data for the week was not encouraging. On Tuesday, the Labor Department reported the US producer price index for final demand. For May, the index for final demand increased by 0.8%, bringing the year to date to 10.6%. The final demand for goods rose 1.4% in May, with 40% of the demand increase attributed to an 8.4% increase in the index for gasoline. The services index increased 0.4% in May, with over half the advance attributed to a 2.9% increase in final demand for transportation and warehousing services.2
Also, on Wednesday, the Commerce Department reported that retail sales for May fell 0.3%, with motor vehicle sales declining and record-high gas prices reducing spending on other goods.3 While rising ten points from May, the Empire State Manufacturing Index remained in negative territory, down 1.2%. The survey split between respondents who thought business conditions had improved versus those who thought business conditions had worsened. Inventories grew, but unfilled orders declined for the first time in over a year.4 The Philadelphia Federal Reserve’s manufacturing activity index fell for the third month with a reading of minus 3.3. and new orders fell to a two-year low. 5
On Thursday, another indication that higher interest rates were taking a toll on the economy, housing starts fell to 1.55 million, down 14.4% below the April revised lower reading and well below the forecast of 1.701 million.6 Over the several months, mortgage rates have risen, impacting affordability.
According to the Department of Labor, initial claims for the week ending June 11, 2022, were 229,000, an increase of 3,000 from the previous week’s revised higher reading of 232,000. Total claims for all benefit programs decreased by 1,441 from the last week to 1,282,096.7
The poor PPI reading, combined with the CPI, the University of Michigan Consumer survey reading from last week, and other economic data, could have provided the impetus for the Fed to become more aggressive on the pace of rate increases. Unfortunately, unless demand destruction takes place, higher interest rates will unlikely cure the inflation problem, given that many of the “root causes” of inflation are government policies and regulations and not solely a function of too much liquidity.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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