Market Pulse

In focus

The Federal Reserve (Fed) will have its two-day July Federal Open Market Committee (FOMC) meeting this week. The twelve-member FOMC is charged with rate-setting policy and markets are pricing in a 75 basis point (0.75%) rate hike. This would bring the top-end of the benchmark short-term lending rate up to 2.5%.

The Fed’s actions in normalizing policy this year has begun to have an impact on three key areas of the economy as it looks to tame inflation with its aggressive actions.

The first is the housing market, and we received existing home sales and housing permit data last week suggesting the market is continuing to cool amid borrowing rates that are nearly two times the pandemic lows. However, housing data is cooling from previously red-hot levels. The next area is commodities where the Bloomberg Commodity Index has declined by roughly 15% from the June highs, primarily as a result of feared demand destruction via slowing economic growth. Finally, the impact to initial jobless claims must be watched closely as an indication of how companies might be feeling about their economic futures. Last week showed a 251,000 increase, the highest this year and the third weekly increase in a row. Again, context is important as the unemployment rate still resides at a very low 3.6% and the economy continues to add jobs at a robust rate.

These are among the areas that have spooked investors about the state of the economy. We maintain that a recession is not a foregone conclusion, though we acknowledge that risks are rising. There are pockets of strength in the economy, particularly the strength of the consumer, businesses that are in good shape, and a still-strong labor market. 

A look back

• Global stocks marched higher last week as a broad-based rally lifted international developed (+4.4%), emerging markets (+3.0%), and U.S. stocks (+2.6%).
• The 2/10-year U.S. Treasury yield curve remains inverted and dipped further into inversion last week. The 10-year yield declined as did the 2-year yield following softer economic data releases.
• The European Central Bank (ECB) increased their short-term policy rate by 0.50%, getting the benchmark rate to 0% amid fears of weak growth, political instability, and energy insecurity.

A look ahead

• This week’s FOMC meeting will be top of mind as investors look for any change in tune from Fed officials as they try to tame inflation without denting economic growth.
• June Personal Consumption Expenditures (PCE) data will be released this week providing Fed officials with their preferred metric regarding prices.
• Economic Releases: New Home Sales, Durable Goods Orders, Personal Consumption Expenditures, Univ. of Michigan Sentiment, Conference Board Consumer Confidence, Q2 GDP.