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Weekly Market Update for July 15, 2022

by Jared Plotz

Amidst elevated risks to global growth, last week’s strong US jobs report and this week’s better-than-expected June retail sales highlight the lack of clear direction of the US economy. Are we headed for contraction or simply slower growth? What these recent data points do cement is at least a 75bps interest rate hike by the Federal Reserve when they meet in two weeks.

After Wednesday’s hotter-than-expected (June) CPI inflation report (headline +9.1% y/y and “core” +5.9%), bond markets were quick to price in a 100bps hike in July. But this probability fell after multiple Fed policymakers echoed the case for 75bps – not the bigger hike traders penciled in – and equity markets rallied from the Thursday morning low. As we noted last week, this may be the inflation peak.

With most investors preparing for an economic recession and sentiment very weak, if a recession does show its face investors will likely look past a mild or temporary slowdown. If economic disaster doesn’t materialize, we could see stocks and higher-yielding fixed income substantially recover YTD declines. Either way, much of the pain has already been felt after the markets saw their worst first-half start in over 50 years.

This week kicked off second-quarter earnings season, with JPMorgan and Wells Fargo reporting along with UnitedHealth Group. The banks are showing favorable margin improvement as interest rates have risen and overall loan growth remains good. Consumer and business credit remains healthy, but non-interest “fee” income is now a drag. Consumer demand for mortgages has dwindled and investment banks’ debt & equity underwriting is materially down. JPMorgan was forced to pause their common stock buybacks after Fed stress tests, during this period of greater global volatility, required them to raise their capital buffers.

The S&P 500 finished this week down -0.93% while the Nasdaq fell -1.57%. Next week will bring more earnings reports from Financial, Healthcare, Materials and Consumer sectors. We will also get a second June inflation reading (PMI) and housing data. The ECB will meet and possibly hike rates in Europe by 25bps.

Keep cool this weekend!

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