Equities recovered last week, but inflation data looms. Equities are at nearly the same level as they were on May 17th. Yet, in that time, the asset class has seen moves of –4.5%, +7%, -12%, +17%, and –9% over the past 4 months only to end up in the same spot.
Clear direction either way is something the markets are sorely lacking. One thing that is certain is that the Fed is dedicated to raising rates. Multiple Fed speakers, most notably Fed Governor Waller, indicated further “significant” rate increases. Bond yields jumped last week and the 30-year mortgage rate is nearing 6%, a level we haven’t seen since 2008. Investors continue to hope on a Fed pivot that even the Fed itself has debunked.
The economic data continues to soften, but the market is looking out beyond the current economic fundamentals.
The Fed’s Beige Book released last week showed that, overall, economic activity was unchanged. Five of the regions showed slight-to-modest growth, which means that the other 7 regions were flat-to-negative economic growth. Credit Card activity unexpected slowed in July, perhaps indicating a strained U.S. consumer. The consensus view is that the inflation numbers will show a 2nd consecutive month of declines. The final August numbers are likely to move markets either way. If inflation is shown to have declined again in August, investors are likely to cheer, with a view toward less stringent Fed rate hikes. If the numbers prove to be higher, it means that inflation has not yet peaked and the Fed's rate hikes have not yet filtered through the economy - or worse, have not been effective.