Sightline Weekly Market Update: What the Latest Economic Data Could Mean for Fed Policy
North American equity markets slumped for the third consecutive week, with the S&P 500 entering bear market territory, falling 23% year to date, while the TSX was down 12%. Since the last FOMC meeting, where Federal Reserve Chair Powell repeated the need for a more prolonged restrictive policy, volatility has returned with a vengeance. The debate of the last couple of weeks about when the Fed might pivot and whether the Fed could orchestrate a soft landing has given way to resignation that a recession is on the horizon. Investors are worried the Fed’s aggressive rate increases, if continued, will break the back of the economy.
European and Asian markets shared the worries of inflation leading to a recession and weaker currencies relative to the USD. European central bankers are calling for rate hikes in the coming months. Equities responded by moving lower in the week, with the pan-European STOXX Europe Index falling a modest 0.65%. The French CAC 40 held up the best, losing 0.36%, followed by the German Dax sliding 1.38%, the UK’s FTSE falling 1.78%, and Italy’s FTSE MIB Index declining 1.98%. The Asian markets also struggled in the week, with the Japanese broad Nikkei Index tumbling 4.5% and the Shanghai Composite Index losing 2.1%.
The week started with several of the Federal Reserve regional presidents presenting their respective views on economic conditions and defending the need to control inflation. Comments did little to calm the markets.
On Tuesday, the US Census Bureau reported that durable goods orders for August fell 0.2%. Excluding transportation, new orders rose 0.2%; however, excluding defense, new orders decreased by 0.9%. Shipments increased 0.7%, up fifteen of the last sixteen months. Unfilled orders and inventories increased over the previous twenty-four months and nineteen months, respectively.1 In a sign that higher rates are impacting housing, on Tuesday, the S&P CoreLogic Case Shiller 20-city house price index posted a 16.1% year-over-year gain for July, down from 18.7% in the previous month.2 In a broader measure, housing prices nationwide fell 0.6% from the last month. The recent data shows the first negative month-over-month decrease since May 2020 amid the Covid-19 pandemic lockdown.3 As measured by the Conference Board, consumer confidence increased in September to 108.0, up from the August reading of 103.6. The index that tracks consumers’ assessment of current business conditions rose to 149.6 from 145.3 last month, and consumers’ expectations of the outlook for income, business and labor conditions increased to 80.3 from 75.8.4 Single-family house sales seasonally adjusted as reported by the Census Bureau jumped 28.8% in August compared to July. This jump is in contrast to the 8.6% decrease in July, and the median home price was $436,800, down slightly from the April high of $458,200.5 Many analysts thought the August increase was an outlier and was not sustainable at current mortgage rates.6
On Thursday, the Labor Department reported that the initial claims were 193,000, a decrease of 16,000 from the previous week. Continuing claims for all benefit programs for the period ending September 10 increased by 6,855 from the last reading to 1,302,353.7 The latest claims data is ongoing confirmation of the strong labor market when the US Fed has said on several occasions that they are looking for increasing claims as one of the data points needed to indicate that the economic conditions are slowing.
The big economic news came on Friday with the release of the latest PCE price index and the Core PCE. The PCE price index month-over-month rose 0.3% in August, attributed to a sharp decline in gas prices, and year-over-year fell by 0.2% to 6.2%. The Core PCE, which excludes food and energy and is favored by the Fed as a more accurate indication of inflation, jumped 0.6% in August and year-over-year increased 0.2% to 4.9%. Personal income remained flat, but disposable personal income increased slightly by 0.1% in July.8
Despite falling commodity prices, the latest inflation data suggests inflation could be persistent and lead, as the Fed has said on several occasions, to higher rates than market participants anticipate. As the reality of the complex environment is digested, we believe that volatility and a continuation of the bear market are not out of the question.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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