Equities declined all week on inflationary data, but rallied on Monday at the prospect of stable rate hikes. Markets were volatile last week on choppy trading due to June’s inflation numbers and speculation about the Fed’s rate hike later this month.
The June Consumer Price Index increased to a level of 9.1%, year-over-year. The Producer Price Index increased more than expected, to a level of 11.3%,, with May’s number being revised higher. The inflation numbers caused investors to speculate on whether the Fed would hike rates 100 basis points instead of the already-accepted 75 basis points. Futures on Implied Fed Rates for the meeting on the 27th moved all over the place last week swinging in favor to 100 bps, to a 50:50 proposition, to 71% in favor of 75 basis points today.
When we dig into the inflation numbers, we still see some disturbing trends. First, we thought PPI had begun to peak as May's data looked to have declined for the 2nd consecutive month.
However, the June report showed a revised May number, along with June's number that shows PPI has not yet peaked. This means there is little chance CPI has peaked, therefore, consumers are in for higher costs moving forward. Second, year-over-year Wages have declined for the 3rd consecutive month while Inflation continues to march higher. The gap between what consumers are earning versus the prices they are paying has continued to increase. Lastly, as inflation moves higher, Consumer Sentiment is steadily declining. The consumer, who comprises two-thirds of GDP, is definitely feeling stretched to make ends meet.
Meanwhile, recession fears continue to mount. It’s early in the corporate earnings season, but 2nd quarter earnings are falling short so far.
With 7% of S&P 500 companies having reported, 60% have beat earnings expectations, which is below the 5-year average of 77%. The Fed’s Beige Book released on Wednesday revealed several Districts reported growing showed signs of a slowdown in demand, and contacts in five Districts noted concerns over an increased risk of a recession. The NFIB Small Business Optimism index has reached a low not seen since the pandemic, and before that, a level not seen since 2013. The Labor Force Participation Rate (62.2%) is basically the same as it was 40 years ago. This could be throwing off the Unemployment Rate, which has been a bright spot in the economy, as perhaps less reliable given the rest of the economic data. Expect more choppy trading in the weeks ahead as markets try to determine the Fed’s next move.