Weekly Market Update: July 18, 2022
The nation created 372,000 jobs in June. That figure surpassed the consensus expectation and was almost on par with the solid May total of 384,000. For the first six months of 2022, nonfarm payrolls climbed by 2.74 million positions, another sign that the labor market is still healthy, despite the Federal Reserve concentrating more on the other half of its dual mandate, which is to promote stable prices.
Reining in inflation will not be an easy task, as prices have shown few signs of easing. On point, the Consumer Price Index (CPI) advanced at a 1.3% clip (+0.7% excluding food and energy) in June, a pace that remains well above the neutral rate of around 0.2%. On a 12-month basis, consumer prices jumped 9.1%, while the core CPI, which excludes the volatile food and energy components, climbed 5.9%.
Minutes from the June Federal Open Market Committee (FOMC) meeting showed a very hawkish central bank. This is unlikely to change in the near future, given the aforementioned strong June labor market and pricing data. The Federal Reserve is expected to hike the benchmark short-term interest rate by 0.75% at its July 26-27 FOMC meeting.
The more-restrictive monetary policies are starting to take a toll on some sectors. Housing demand and commodity prices have fallen recently. The Fed appears willing to accept some demand destruction to avoid inflation becoming entrenched. The risk, though, is hitting the monetary brakes too hard and driving the economy into a recession.
The recent inversion of the Treasury yield curve bears watching. Historically, protracted inversions (when yields on short-term Treasury notes exceed those of longer durations) have preceded recessions. An inverted yield curve reflects investors’ expectations for a decline in longer-term interest rates, as a result of future deteriorating economic conditions.
Conclusion: With the Federal Reserve raising rates aggressively into what is looking like a period of slowing earnings growth for Corporate America, it creates a challenging investment backdrop.