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Coming off the Fourth of July holiday, we saw an abbreviated trading week and a slight rally of the S&P 500 and Dow. The market saw gains for growth and tech stocks which have been hit hard year-to-date. In rates markets, United States Treasury yields were up last week after a strong job report and a strongly inverted yield curve where short-term treasuries yield more than long-term treasuries and are a recessionary indicator. Commodities remained generally flat, including oil, which has been hovering around $100/barrel, nearly 20% lower than a month ago. Lumber, a key commodity that saw strong price increases early in the pandemic on strong housing and renovation demand, is down nearly 40% for the year.
This weeks’ “good news is bad news” segment related to nonfarm payroll numbers, which came out Friday. Consensus estimates projected 240,000 additional jobs added in June, as opposed to the 381,000 new jobs created, but we also saw April and May numbers revised downward. Importantly, unemployment stayed unchanged at 3.6% and unemployed persons held steady at 5.9 million. We see the good news in a resilient labor market in the face of a set of rate hikes unprecedented in recent history, but the bad news follows as high employment numbers may continue buoying consumer spending and driving the inflationary pressures the Fed is seeking to suppress.
On the topic of inflation, minutes from the June Federal Reserve Open Market meeting came out on Wednesday, reiterating their commitment to controlling price inflation even at the cost of slowing the economy. The minutes mirrored market consensus for a 50 to 75 bps rate hike in July and reiterated that this or an even greater pace of hikes could be appropriate if inflation remains above the target long-term rate of 2%. Overall, continued strong inflation and strong Fed action has seen the market showing increased concerns of a hard landing by the Fed.
We are about to enter the beginning of the Q2 earnings season and the release of a key inflation measure, the Consumer Price Index for June. It will be important to watch the differences between CPI and core CPI, as CPI better reflects the pricing pressures faced by consumers, while core CPI better indicates the long-run path of inflation. We have seen the Federal Reserve Open Market Committee take drastic action this year to rein in inflation to meet its dual mandate of price stability and employment. With inflation holding out and the backdrop of global geo-political uncertainty, we see increased recession risk priced into the market. Second Quarter earnings will shine more light on the strength of the economy, while CPI numbers will provide guidance surrounding the likelihood of a 50bps or 75bps rate hike this month.
In the weeks ahead, investors will likely see more volatility, as news develops, and we navigate unprecedented and uncharted markets. John 7:24 says “Look beneath the surface, so you can judge correctly.” This verse is an excellent reminder in the current stock market “seas.” While markets react impulsively, our team prepares to dive deep in order to serve our clients with sound judgment.
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