Week Ending July 8, 2022
Market Update
Global Equities, Fixed Income & Commodities
Global Equities: Markets were mostly positive during the holiday-shortened week, a much-needed relief for investors after the market suffered its worst first half of a year since 1970. The S&P 500 Index ended the week up 2.0% while the Nasdaq outperformed with a 4.6% gain and the Dow Jones Industrial Average lagged its domestic peers with a 0.8% rise. Overseas, Developed International markets were weaker, down -0.5%, primarily due to political turmoil with both the resignation of British Prime Mister Boris Johnson and the assassination of former Japanese PM Shinzo Abe. Elsewhere, Emerging Markets stocks were up a modest 0.6%.
Economic Update
Jobs, Rate Hikes & Earnings
June Jobs Strength: While the Fed’s struggles with managing to contain runaway inflation continues, the other half of its dual mandate, full employment, remains intact. The June jobs report showed unemployment flat at just 3.6%, with 372,000 jobs added during the month, a larger increase than expected. With June’s gains, the US is now just 524,000 jobs short of the number it had in February of 2020, prior to mass pandemic layoffs. The private sector has already regained all the jobs lost to Covid, with government sector jobs accounting for the lost employees. The strong jobs data means that the Fed can freely hike rates without concern over an uptick in job losses from a slowing economy.
Charts of the Week
10 Year Treasury – Inverted Yield Curve
Our first Chart of the Week is the spread between 10-year and 2-year US Treasuries, showing why this measure is a closely watched predictor of recessions. In the chart, the vertical grey areas represent recessions, and the blue line represents the difference between the 10-year yield minus the 2-year yield. In most – but not all – cases a recession occurs within a year or two of a yield curve inversion (when the yield on 2-year bonds exceeds that of 10-year bonds). By some indications we may already be in a recession – albeit not in the same severe sense we’ve experienced over the last 20-years – although given the robust job market and resilient consumer spending behavior, the severity and duration are still very much uncertain.
5-Year Projected Annualized Inflation
The days of relentlessly rising inflation seem to be coming to an end. In March, financial markets were predicting an annualized inflation rate of around 3.5% over the next five years; now, that number is down to 2.6%. Traditionally, the Fed’s target rate for inflation is around 2.0%. Showing that, to some degree, whatever the Fed is doing: it’s working.
US Dollar Strengthening – 20-Year-High
Our last chart is a 20-year look at the US Dollar. The dollar has broken into a 20-year-high in response to interest rate hikes. A strong dollar tends to decrease the price of imports, which would weigh on US inflationary pressures through the consumption channel – a positive. At the same time, it would cause foreign purchasers to switch from more expensive, dollar-based, goods to cheaper alternatives produced elsewhere – a negative. All of which would dampen the demand for U.S. exports while assisting the shift in policy toward bringing inflation back down around the central bank’s 2% target, even at the expense of slower growth and possibly higher unemployment next year.
Lastly, the euro tumbled 1.29% to $1.0056 against the U.S. dollar, the weakest since December 2002 – approaching parity with the US dollar. The dollar gained 1% against a basket of six major currencies, reaching 108.14, the strongest since October 2002.
