The equity markets stressed over inflation data, corporate earnings releases for Q2, and earnings guidance for Q3. All North American equity markets finished the week lower, and in Europe, except for the French CAC 40 gaining 0.05%, all other major European indices declined. Technology held up in the week, with oil falling to levels not seen since before the Russian invasion of Ukraine. Generally, commodities continued to roll over from highs reached in April on fears of an economic slowdown and the accompanying demand destruction.
On Tuesday, the Small Business Optimism Index for June dropped to 89.5 from 93.1 in May and was well below expectations of 92.5. All ten subcomponents of the index declined, with those respondents expecting higher real sales tumbling by 13 points, those hoping the economy to improve and hiring to increase fell by 7 points, and those thinking it is a good time to expand falling 3 points. All other subcomponents fell by 1 to 2 points. Tight labor markets, increasing compensation, and labor quality are still hot-button issues. Small business sentiment is increasingly bearish and firms expecting better conditions fell to the lowest level in the survey’s history. Higher costs are expected to erode profits and are one of the primary reasons for the fall in optimism.1
On Wednesday, the US Bureau of Labor Statistics released the June monthly Consumer Price Index showing an increase of 1.3%, and the all items index increased to 9.1% annualized. The 9.1% increase is the largest annual increase since November 1981. Surging gasoline prices, up 7.5% in the month, contributed almost half of the monthly increase. The all items index less energy and food rose 0.7% after 0.6% in May. Many analysts point to recent falling gasoline prices, suggesting inflation is peaking.2
In Canada, the week’s big news was the Bank of Canada surprising the market by raising rates by 1% to 2.5%. Most analysts had expected a 75-basis point hike. The Bank of Canada is one of the most aggressive central banks leading the US Fed in rate hikes. In its April Monetary Policy Report, the Bank mentioned, “surveys indicate more consumers and businesses expect inflation to be higher for longer, raising the risk that elevated inflation becomes entrenched in price- and wage-setting. If that occurs, the economic cost of restoring price stability will be higher.” The Bank is confident that front-loading rates is the best way to achieve a soft landing.3
On Thursday, the US Labor Department released the initial claims for the week ending July 9, showing an increase of 9,000 from the previous week to 244,000. Continuing claims for all benefit programs for the period ending June 25 increased by 72,504 to 1,400,350.4 On Friday, retail sales were better than expected, rising 1% in June compared to the estimates of 0.9%. Gasoline, online sales, and bars and restaurants were the most significant contributors to the monthly increase. Factoring in inflation, which was 1.3% for the month, retail sales were slightly negative for the month.5 The Empire State Manufacturing Survey conducted by the Federal Reserve Bank of New York showed a modest improvement in business activity, with the index rising to 12.3 points from 11.1 in July. New orders increased, and unfilled orders decreased slightly. The negative in the report was that firms turned pessimistic about future activity over the next six months, with the index dropping twenty points to a negative 6.2.6
As we advance into the year’s second half, investors will bounce between weak optimism and significant pessimism, causing more volatility for equities. The outlook for the next six to twelve months is anything but rosy, with a recession thought to be around the corner. Chances are for inflation to be more persistent than hoped, with food and energy at the top of the list for most of the population.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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