Investors’ Focus Remains on Inflation, Consumer Sentiment, and Q2 Earnings
The 10-year U.S. Treasury yield ended the week at 2.92%, though the 2-year/10-year Treasury spread inverted to its widest level since 2000. The U.S. Dollar Index rose +1.0% last week after the euro fell to parity against the dollar for the first time in twenty years.
Gold moved down 2% to $1,704.20 per ounce, and West Texas Intermediate (WTI) crude dropped nearly 7.0% on the week, closing at $97.44 per barrel. Note: WTI is down substantially from its March 7 high of $130.50, while the AAA national average price of a gallon of regular gasoline stands at $4.58, down from the $5.02 reached on June 14.
The Federal Reserve’s path forward on interest rate hikes is still a central focus for markets
Inflation, updates on the health of the consumer, and the start of the Q2 earnings
season were the standout items for investors last week.
The June headline Consumer Price Index (CPI) rose +9.1% y/y, surpassing May’s previous highwater mark of +8.6%. As a result, headline inflation hit its highest level since December 1981 last month, driven by gasoline prices, surging +11.2% in June alone.
Over the previous year, Energy is higher by +41.6%, gasoline is up just shy of +60.0%, and food (i.e., meat, poultry, fish, and eggs) is higher by +11.7%. In addition, core CPI (excluding food and energy) rose +5.9% y/y, down from the +6.0% seen in May. Bottom line: Consumer prices continued to rise across a broad range of products and services last month, with minimal signs of relief. In addition, producer prices ran “hot” in June, proving that both companies and consumers are seeing very little reprieve from higher prices.
Immediately following the CPI report, fed fund futures priced in a roughly 90% probability the Federal Reserve’s Federal Open Market Committee (FOMC) would lift its target rate by 100 basis points (1.0%) at the July 26-27 meeting. However, those probabilities have dropped below 30% after Fed Governor Christopher Waller commented on Thursday that the market was “getting ahead of itself” on pricing in such an aggressive rate move. In our view, whether the Fed lifts its target rate by 75 or 100 basis points at the end of the month, financial conditions are getting tighter, which is likely to slow growth further.
Notably, the Federal Reserve is under intense pressure to use its influence on rates to stem price pressures and cool demand in the economy. In our view, the June CPI print turns up the heat on the central bank and could threaten its credibility if it cannot demonstrate it can return price stability to the market over time through policy actions.
Concurrently, there is mounting evidence that growth is already slowing, consumer habits are changing, and inventories for certain goods are building. Given that Fed rate hikes act with a lagging effect on the economy, continued aggressive moves this year are unlikely to fully impact growth until sometime in 2023. And that’s the rub for the Fed. They need to tap the breaks on the economy today (through higher interest rates) to slow inflation, but without fully understanding how their actions will affect the economy in the future. Hence, more market participants now believe the central bank will steer the U.S. economy into a recession.
Consumers’ feelings and actions about the economy and their personal financial situation differ
Given record-high inflation and the cost of pretty much everything under the sun costing more these days, it’s understandable consumers feel lousy about the U.S. economy and stock market. Shrinking 401(k) balances, higher loan rates, wages that haven’t kept pace with inflation, and more expensive trips to the gas station and grocery store have many consumers feeling like their paychecks are shrinking. However, what consumers are willing to say about how they feel and what they express through their actions, at times, can look off-center.
Last week’s preliminary look at July Michigan Sentiment showed consumers remain very downbeat about the economy and their personal financial situation. However, sentiment improved from June. The headline July consumer sentiment reading came in at 51.1, slightly better than June’s 50.0. Expectations for the future remained essentially unchanged versus June levels and sat at very depressed levels. Yet, the current conditions portion of the Michigan sentiment report showed improvement month-over-month, while long-run inflation expectations dropped modestly in July from downwardly revised June levels. Bottom line: Respondents’ assessment of their personal finances in July continued to deteriorate and are currently at their lowest levels since 2011. Inflation remains the most significant drag on sentiment in the survey, as 49% of respondents blamed higher gas prices for eroding their living standards. That matches the all-time high seen during the financial crisis.
Yet, June retail sales showed consumers remain willing and able to spend across a broad range of goods and services, albeit with added headwinds. Headline retail sales advanced +1.0% month-over-month in June and climbed higher by +8.4% year-over-year. While gas stations showed the largest jump in sales last month, for obvious reasons, only four of thirteen measured categories in the retail report posted sales declines on an m/m basis. Non-Store (Online), Furniture, Miscellaneous, and Bars/Restaurants are other areas consumers directed their hard-earned cash in June. However, underneath the still solid retail sales report is the fact that consumer prices rose +1.3% in June — more than the +1.0% uptick in sales last month. Notably, while retail sales trends remain strong, higher prices are a contributing factor to that strength. That’s not necessarily a positive dynamic for assessing consumer spending strength.
Regardless, last week’s look into recent data suggests consumers remain very downbeat about the economy, principally due to inflation. Yet consumers continue to spend at a healthy clip, given still strong balance sheets and ample income to help cushion the blow of inflation. That said, how long consumers can weather the inflation storm without seriously altering their spending patterns remains a key question for the market.
In the week ahead, investors will focus on Q2 earnings and home data
This week, investors will focus on the Q2 earnings season, as 73 S&P 500 companies, including seven Dow 30 components, report results. A host of financial companies line the week’s earnings calendar, with a few Tech, Industrial and Communication Services reports also on the docket. At least early on, Q2 results/outlooks from the big banks have shown mixed trends. Stronger-than-expected net interest income and solid consumer credit/trading trends have been weighed down by banks raising capital to protect against an economic downturn and weaker mortgage/investment banking fees. In addition, S&P 500 profit margins are expected to decline for the second consecutive quarter, as producer prices rose at their fastest year-over-year clip on record in June. Given higher inflation levels and more difficult year-ago comparisons, investors will be carefully looking for clues from corporate America on how they see the second half of the year developing.
In addition to the heavy slate of earnings this week, a batch of home data will likely provide further color on an essential component of the economy and consumer sentiment. According to Redfin, nearly 15% of home contracts in the U.S. were canceled last month due to higher interest rates and a slowdown in housing. Census Bureau updates on June housing starts will be released on Tuesday, as well as building permits. In May, housing starts fell to their lowest level since April 2021. On Wednesday, the National Association of Realtors releases existing home sales for June, which are expected to decline month-over-month. Existing home sales have declined for four straight months. Finally, a preliminary look at July manufacturing and services activity hits on Friday.
Overseas, the European Central Bank (ECB) is expected to lift its target rate by 25 basis points for the first time since 2011.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
The fund’s investments may not keep pace with inflation, which may result in losses.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund’s income and yield. These risks may be heightened for longer maturity and duration securities.
Past performance is not a guarantee of future results.
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees. It is not possible to invest directly in an index.
The S&P 500 Financials Index is an index containing companies included in the S&P 500 that are classified as members of the financials sector.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
Definitions of individual indices and sectors mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section.
West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas.
University of Michigan Consumer Sentiment Survey is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95% level in the Sentiment Index is 4.8 points; for Current and Expectations Index the minimum is 6.0 points.
Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.
Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.