Market Pulse

Market Pulse

August 1, 2022

Market views heading into the week highlight what we're watching and important news ahead.

In focus

The two primary market movers remained in the driver’s seat last week — inflation and economic growth. The Federal Reserve (Fed) continued to battle inflation by raising interest rates another 75 basis points (0.75%). Additionally, U.S. second quarter Gross Domestic Product (GDP) was released, showing the second negative real growth quarter in a row. This dichotomy of higher inflation or slower growth highlights the challenge that the markets are struggling to price.

Despite the oversized Fed funds rate hike last week, U.S. equity markets marched forward, taking some small pieces of hope from Fed Chair Powell’s press conference after the decision. Powell reiterated the flexibility of the Fed going forward but said they would be less clear about forward policy decisions and markets took this to mean that they would be slowing down their aggressive rate hikes. The bond market looked through this optimism and continued to price in anticipated economic hardship.

As mentioned, the U.S. economy again experienced negative growth in the second quarter with a -0.9% annualized rate. This mainly highlights the huge price increases as nominal GDP was up 7.8% on an annualized basis. The U.S. consumer was one of the bright spots, while business investment and inventories continued to be a drag on overall economic output for the quarter.

We expect the market to be range bound as this tug-of-war continues and the short-term risk/reward isn’t appealing in our view. Individual time frames are important as is having an asset allocation aligned with one’s goals and risk tolerance. For investors who are overallocated to equities relative to their long-term allocations, our view is this is a reasonable spot to trim exposure.

A look back

  • Global equities posted strong gains last week. The U.S. led the way with the S&P 500 up by 4.3%, followed by international developed markets’ 2.1% gain. Emerging markets lagged, gaining 0.4%.

  • Bond yields fell last week in a mostly parallel move as market participants continued to price in an economic slowdown. Accordingly, the 10-year yield dropped by about 0.13%.

  • The Federal Reserve (Fed) raised interest rates by another 75 basis points (0.75%) pushing the federal funds rate to a range of 2.25-2.5%. 

A look ahead

  • After the Fed and the European Central Bank raised rates the past two weeks, the Bank of England will likely lift their policy rate this week too in a global synchronized monetary tightening dance.

  • Investors will be watching the July jobs report this week for signs of labor market strength and any potential shift in policy from the Fed as a result.

  • Economic Releases: S&P Global U.S. & ISM Manufacturing/Services, Durable Goods Orders, Factory Orders, Trade Balance, Nonfarm Payrolls, and the Unemployment Rate.

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