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The Good, The Bad and The Fed

By Jack Kraft, CFA, Advisor Directed Portfolio Analyst and Ben Norris, CFA, Securities Research Analyst, Associate Vice President

U.S. stocks were mostly higher in the first week of August as investors digested economic data and key earnings reports. The S&P 500 (SPX) gained 0.4% last week, capping its third consecutive weekly advance. Six of the 11 S&P 500 sectors gained last week with Information Technology and Consumer Discretionary pacing the gains. Energy saw the broadest declines with the sector falling 6.8% amid a steep drop in WTI crude prices. Meanwhile, the Tech-heavy Nasdaq Composite (COMP) was the standout index jumping 2.2% last week. The Dow Jones Industrial Average (DJIA) fell slightly as cyclical sectors underperformed.

Key economic data reports indicated that the U.S. economy has remained surprisingly resilient despite two back-to-back quarters of negative GDP data. ISM Manufacturing and Services data provided more encouraging data that consumers are rotating from spending on goods into services. ISM Manufacturing, which measures production of goods, edged down in July to 52.3 from 53. Whereas, the ISM services Index unexpectedly increased, rising to 56.7 from the prior reading of 55.3. Any reading over 50 indicates that the two sectors driving the U.S. economy are in expansionary territory. The other big piece of news was a blockbuster employment number on Friday. Nonfarm Payrolls surged back above pre-pandemic levels, rising 528,000 in July, more than double consensus expectations. In addition, last month’s number was revised higher by 28,000, while the unemployment rate slipped down to 3.5% – also near pre-pandemic levels.

In less-positive economic news, it appears that the money consumers saved thanks to stimulus checks (and not having opportunities to spend due to pandemic restrictions) has begun to run out. Credit card debt rose 13% year-over-year in the second quarter after seeing a decrease in prior quarters. This was the largest jump in credit card debt in more than 20 years, according to the New York Fed. Overall real household debt (adjusted for inflation) also saw an increase as consumers are forced to borrow more to fund home and auto purchases. The prices for new homes and cars have spiked significantly since the beginning of the pandemic thanks to ongoing supply chain issues. Similarly, the rate of delinquencies among consumers with lower credit scores has moved higher, but thankfully remains low relative to history.

Good news for the economy does not always translate to higher stock prices. It is important to remember that the Federal Reserve is data-driven and are currently watching three things: the labor market, inflation, and economic growth. A stronger-than-expected labor market coupled with a resilient services economy gives the Federal Reserve room to push rates higher in the near term. In fact, markets are beginning to price in the likelihood of a third 75-basis point hike during the FOMC’s September meeting. This can change quickly depending on how inflation data develops over the coming weeks. The 10-year bond yield jumped 20 basis points last week amid expectations for a more aggressive rate hike in September. Fed Chairman Jerome Powell has reiterated that bringing inflation down to a more normalized level is the top priority of the Fed.

It is important to remember that what is playing out this month is similar to what happened in early July. A better-than-expected payrolls number and a high print on CPI shook investor sentiment with markets moving slightly lower through mid-July. From July 15 on (11 trading sessions), it was off to the races with the S&P 500 ripping more than 9% higher into month-end for its best monthly performance since November 2020. Although macro headwinds remain (geopolitical risks, slowing growth and inflation pressures), it is important to remember how quickly markets can change directions and head back toward recent highs. Expect volatile markets this coming week as market participants look for clarity whether record inflation will persist or if underlying data indicates that we’ve finally seen a peak.

Looking ahead this week, economic data and earnings reports will remain top of mind for investors. Headlining the economic calendar will be Wednesday’s updated print on the consumer price index (CPI) for July. The prior reading showed a cycle high 9.1% print driven by food and energy prices. Adding to the inflation picture will be updates on the producer price index (PPI) and a preliminary update on the University of Michigan 5-year inflation expectations on Thursday and Friday, respectively.

Date Report Previous Consensus
Monday 8/8/2022 NY Fed 3-year Inflation Expectations (July) 3.6%
Tuesday 8/9/2022 NFIB Small-Business Index (July) 89.5 89.5
Labor Productivity (Q2) -7.3% -4.3%
Unit Labor Costs (Q2) +12.6% +9.3%
Wednesday 8/10/2022 Consumer Price Index (CPI) (y/y, July) 9.1% 8.7%
Core CPI (y/y, July) 5.9% 6.1%
Thursday 8/11/2022 Initial Jobless Claims (August 6) 260,000 265,000
Continuing Jobless Claims (July 30) 1.42M
Producer Price Index (PPI) (July) 1.1% 0.2%
Friday 8/12/2022 U. Michigan Consumer Sentiment Index (August) 52.0 53.0
U. Michigan 5-year Inflation Expectations (August) 2.9%


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