Accretive July 2022 Market Recap

August 4, 2022

In July US investors got a much-needed reprieve from the gloom of June.  Large and small US stocks had strong gains, while developed market stocks outside the US posted more moderate gains.  Emerging market stocks were the only group that did not participate, falling modestly.  

Bond markets continued their recovery, as longer-term interest rates fell and costs for corporate borrowers narrowed.  The short end of the interest rate curve remained elevated, as the Fed raised rates another 0.75% in July.  

The market recovery began mid-June with an 8.6% Consumer Price Index reading for May, which was followed by an even greater 9.1% reading for the month of June.  The market seems to be betting that these numbers represent a peak.   Whether that bet pays off, or inflation remains the key focus for markets going forward, is unknown.

Recently, Fed Chair Jerome Powell indicated that the July interest rate hike brought the overnight rate back to the Committee’s estimate of “neutral”.  He also backed away from giving forward guidance for interest rates coming out of the September meeting, pledging to be data dependent.  The market seemed to interpret these remarks as peak Fed hawkishness.  

Fed governors are now in the media trying to disabuse the market of the idea that the Fed may pivot.  That may not be enough to talk the market down.  Often when the market can see a potential resolution to an economic problem, it begins to price that resolution in, even if it has not happened yet.  Whether or not that resolution ultimately pans out is an issue for another day.  

There are reasons to think that the inflation issue will soon be trending in the right direction.  The Cleveland Fed Inflation Nowcast sees month-over-month CPI decelerating to 0.27% and 0.32% in July and August, respectively.   These are the lowest readings since January 2021.  We expect the Fed to be wary of false dawns and for core inflation numbers to be stickier than the headline numbers, but we also note that they have been behind the curve the last 12 months.

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