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Fed Minutes Send Market Lower

Market Data as of Week Ending: 08/19/2022 unless noted otherwise

Equities

U.S. stock prices ended the week lower, snapping a string of four consecutive weekly gains for the S&P 500 and NASDAQ as investors digested a host of earnings and economic data. The reversal in the market’s rally came after the July FOMC meeting minutes revealed policymakers would likely continue to raise rates in the short term. Value stocks held up better than their growth counterparts while large companies outperformed their small and mid-sized peers. The S&P 500 experienced a relatively broad-based pullback amongst its sectors with only traditional defensive sectors, consumer staples and utilities, along with energy recording a gain. Cyclical and sensitive sectors such as communication services, materials, and financials fared the worst. Developed foreign and emerging stock prices moved lower and lagged the U.S. for the week.

Bonds

U.S. Treasury yields were mixed last week as the Fed minutes impacted monetary policy expectations. The 10-year U.S. Treasury increased to 2.98%, up from 2.85%, as the 2-year remained at 3.24%. Returns were negative across the fixed income spectrum with quality leading to mixed results while shorter duration was positive. Government and corporate bonds outperformed across the short and intermediate duration, while long duration corporate was the worst performing segment. Yields on investment grade and high yield corporate bonds increased, finishing the week at 4.6% and 7.8%, respectively.

Macroeconomic Data

Economic releases were mixed for the week as Monday was kicked off by the Empire State manufacturing index recording its second largest decline on record, one of the lowest levels in the survey history at -31.3 in August. The NAHB home builders’ index slipped to 49 in August, the first time since May of 2020 that the index broke below the break-even measure of 50, as cooling buyer demand has negatively impacted builders’ sentiment. U.S. retail sales were flat in July as cheaper gas prices meant consumers spent less at the pump. The Philadelphia Fed manufacturing index recovered to 6.2 in August from a negative 12.3 last month, suggesting improving conditions. The U.S. leading economic indicators index declined for the fifth month in a row, dropping 0.4% in July, as rising interest rates and pessimism among consumers has dampened the economy. The UK’s inflation rate hit 10.1% in July, the first double-digit reading since 1982, while the Eurozone’s inflation hit a record 8.9% in July.

 

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Cooler-than-expected Inflation Sends Markets Higher

Market Data as of Week Ending: 08/12/2022 unless noted otherwise

Equities

U.S. stock prices moved higher for the fourth straight week, the longest string of weekly gains since November 2021, as investors welcomed the idea that consumer prices may have peaked. In a reversal from previous weeks, value stocks outperformed their growth counterparts while small and mid-sized companies continued their outperformance versus their large company peers. All eleven of the major economic sectors advanced for the week, led by energy, financials, and materials. Traditionally, defensive sectors such as consumer staples and health care lagged. Developed foreign and emerging stock prices moved higher but lagged the U.S. for the week.

Bonds

U.S. Treasury yields ended the week relatively unchanged with the 10-year U.S. Treasury remaining at 2.83% as it appears the treasury market remains skeptical of a softening to monetary policy. Lower quality bonds outperformed for the fourth week in a row and were led by outperformance from long duration high yield bonds. Government and corporate bonds generally advanced across the duration spectrum, while long duration government was the only segment that failed to post a gain. Yields on investment grade and high yield corporate bonds declined, finishing the week at 4.4% and 7.5%, respectively.

Macroeconomic Data

Economic releases were generally positive for the week as Wednesday’s cooler-than-expected CPI reading dominated headlines. The NFIB small-business index rose to 89.9 in July from 89.5, reflecting improved expectations among small-business owners. U.S. productivity fell at a -4.6% annual rate in the second quarter, marking the second consecutive quarterly decline as labor costs are rising sharply. The U.S. consumer price index was unchanged in July, keeping the 12-month inflation rate at 8.5% as the decline in used car prices and goods was able to offset the rise in cost of shelter and wages. The U.S. producer price index fell 0.5% in July, marking the first downshift since 2020 as energy prices fell 9%. The University of Michigan’s preliminary consumer sentiment reading showed improvement as the index rose to 55.1 from 51.1 in July. The BoE expects a recession to begin at the end of the year as the U.K.’s GDP contracted by 0.1% in the second quarter.

 

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Markets End the Week Mixed on Surprising U.S. Jobs Report

Market Data as of Week Ending: 08/05/2022 unless noted otherwise

Equities

U.S. stock prices finished the week mixed as investors weighed U.S.-China relations, earnings and a much stronger-than-expected jobs report. The higher-than-expected job growth revived investors’ concerns that the Federal Reserve will need to maintain aggressive monetary tightening in response to the data. Growth stocks continued their outperformance versus their value counterparts while small and mid-sized companies generally outperformed their large company peers. The major economic sectors produced mixed results for the week with information technology, consumer discretionary and communication services sectors leading the way. Energy and traditionally cyclical sectors such as real estate and materials lagged. Developed foreign stock prices moved lower and underperformed the U.S., while emerging markets outperformed both.

Bonds

U.S. Treasury yields moved higher last week as positive economic data eased recession fears. The 10-year U.S. Treasury increased to 2.83% on the back of the stronger-than-expected jobs report while the 2-year yield jumped to 3.23%. Lower quality bonds outperformed for the third week in a row and were led by outperformance from long duration high yield bonds. Government and corporate bonds failed to post a gain across the duration spectrum. Yields on investment grade rose while high yield corporate bonds declined, finishing the week at 4.5% and 7.7%, respectively.

Macroeconomic Data

Economic releases were generally positive as the “good news is bad news” dynamic remained intact. The ISM manufacturing index fell to 52.8%, marking a 25-month low but showed that inflation pressures eased and was above expectations. Americans added $312 billion in debt in the second quarter, with $46 billion of that on their credit cards, marking the sharpest increase in more than 20 years. The ISM services index rose to 56.7% from 55.3% in July, suggesting the economy continues to expand despite growing headwinds. The U.S. added a surprising 528,000 new jobs in July sending the unemployment rate to a pre-pandemic low of 3.5% as the labor market continues to be a beacon of light. The BoE raised its key interest rate by 0.50% to 1.75%, the biggest increase in 27 years.

 

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Stocks Shrug Off Downbeat GDP to Close Out Best Month Since 2020

Market Data as of Week Ending: 07/29/2022 unless noted otherwise

Equities

U.S. stock prices moved higher last week as markets shrugged off a downbeat GDP report in hopes that economic contraction may slow the Fed’s aggressive hiking cycle. U.S. earnings have proved resilient, with the majority of companies in the S&P 500 beating estimates to start second quarter earnings season. Value stocks lagged their growth counterparts while small and mid-sized companies generally outperformed their large company peers. All the major economic sectors produced gains for the week and were led by strength in the energy, utilities, industrials, and consumer discretionary sectors. Traditionally defensive sectors such as consumer staples and health care lagged. Developed foreign stock prices delivered solid gains and outperformed the U.S, while emerging markets trailed.

Bonds

U.S. Treasury yields declined as expectations for aggressive central bank policies softened. The 10-year U.S. Treasury fell to 2.65% and the 2-year yield ended the week at 2.89% on the back of the Fed’s rate hike and negative U.S. GDP growth. Lower quality bonds outperformed for the second week in a row and were led by outperformance from long duration high yield bonds. Long duration government bonds were the only ones that failed to post a gain. Yields on investment grade and high yield corporate bonds declined and finished the week at 4.3% and 7.8%, respectively.

Macroeconomic Data

Economic releases were generally worse than expected, creating a “bad news is good news” dynamic. U.S. consumer confidence declined for the third straight month in July, dropping to 95.7 as inflation continues to impact the consumer. U.S. pending home sales fell 8.6% in June, significantly worse than estimates, as higher mortgage rates and dampened sentiment likely have potential homebuyers on the sidelines. The U.S. economy shrank by 0.9% in the second quarter, marking the second quarterly decline in a row. The back-to-back declines in GDP were the first since the 2007-2009 Great Recession. The U.S. PCE rose 1% in June, led by higher fuel prices, as inflation remains higher than expectations. University of Michigan’s Consumer Sentiment Index was revised higher, unexpectantly, to 51.5, from 51.1, but still remains at historically low levels.

 

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