Market Note – August 15, 2022

By Hightower Great Lakes on August 15, 2022

Peak-Inflation Rally

Stocks rallied for the fourth straight week last week as the peak-inflation narrative was in focus. Aggregate data across the consumer price index (CPI) and producer price index (PPI) highlighted softening price pressures on a month-over-month basis.

July CPI was flat sequentially compared to June, and, while still elevated at +8.5% y/y, it was below June’s +9.1% y/y. Lower energy prices were a key component to the lower CPI but there were also lower prices in airfares and the travel/hospitality industries.

Excluding energy, CPI increased +0.4% m/m. Energy tends to be a volatile component to CPI and, interestingly, the energy sector was the best performing sector in the S&P 500 last week – possibly indicating more life to the energy bull-run.

PPI fell 0.5% m/m in July, largely based on falling commodity prices. The Fed wants to see “multiple months” of progress before they decide to take a pause, and the latest CPI reading was likely not enough to induce a Fed pivot.

Bloomberg shows a 49% chance for a 75 bps rate hike in September, down from 75% at the start of last week, and 100% chance of at least 50 bps. Suffice it to say, rates will continue to work higher into the end of the year.

Negative Sentiment Continues

August sentiment improved from July but remains very negative. The yield curve remains inverted amid a non-normal bond market, skewed by Fed manipulation – buying bonds into March and now a balance sheet run-off. Inverted yield curves tend to precede recessions by anywhere near 6 months to 12 years.

Chart 1: University of Michigan Sentiment Survey: Depleted Sentiment¹

Elevated inflation and a tight labor market should encourage the Fed to continue tightening. We maintain some concerns around future earnings as inflation pressures persist and rising rates dampen demand with lagged effects. Q2 earnings were above expectations and, assuming the current beat rate, S&P 500 EPS is on pace for +10.8% y/y.

Nation of Spenders

While there are concerns about future profit growth given the macro headwinds, it’s often unfavorable to bet against the consumer. The upcoming quarters will showcase a battle of maintaining demand and managing inventory.

Retailers and suppliers have been caught in the crosscurrents of supply chain challenges that include labor shortages, double-ordering and shifting demand trends. A handful of retailers report this week, including Walmart, Home Depot and Target.

Fixed Income

Last week’s lower-than-expected CPI reading led to a risk-on attitude in equity markets; however, fixed income markets did not buy the hype as much. The 2s/10s spread initially tightened by 15 bps; however, it widened 9 bps on Friday to finish the week at -42 bps.

Corporate spreads took the CPI data as a sign of better health, as the High Yield spread tightened to +449 bps and Investment Grade to +156 bps. The Municipal curve continues to flatten rather quickly, as the short end rose 6-14 bps while the long end rose 2-3 bps.

OPEC Updates Demand Outlook

While OPEC continues to produce below their quota targets, the group lowered their demand forecast for 2022 and 2023 – still projecting a healthy 3.1% growth in both years but saying that obvious downside risk prevails.

This directional change in forecast contrasts with the International Energy Agency (IEA), which raised their demand expectations; the overall demand outlook for 2022 has now narrowed between OPEC and the IEA. A key trend that both organizations mentioned in their latest report was switching from burning gas to burning crude, amid natural gas supply/demand imbalance.

Housing Data this Week (Preview)

This week’s housing data is expected to show continued softening in the housing market. Last week, Bloomberg reported a rising supply of new homes relative to homes sold. Realtor.com showed that inventory of listings reached a record high in July, +31% y/y.

Despite the surge, inventory still remains below pre-pandemic levels and the median price was up 17% y/y. Rental costs, which lag home prices, also continue to rise according to a variety of data sources, including CPI.

The Week Ahead

Earnings – Tuesday: WMT, HD. Wednesday: TGT, LOW, TJX, CSCO. Thursday: EL, AMAT. Friday: DE, FL.

Economics –Monday: NAHB Housing Market Index (August). Tuesday: Housing Starts (July), Industrial Production (July). Wednesday: Retail Sales (July), July FOMC Minutes. Thursday: Philadelphia Fed Index (August).

Return for Selected Indices²

		% Change
Index Name	End of Week	Week	Month	YTD
S&P 500 INDEX	4,280	3.31%	12.73%	-9.35%
NASDAQ COMPOSITE	13,047	3.10%	16.07%	-16.20%
DOW JONES INDUS. AVG	33,761	2.99%	9.85%	-5.98%
RUSSELL 1000 INDEX	2,358	3.39%	13.13%	-10.06%
RUSSELL 2000 INDEX	2,017	4.97%	16.94%	-9.51%
FTSE 100 INDEX	7,501	1.18%	5.37%	4.20%
HANG SENG INDEX	20,176	-0.11%	-2.96%	-11.68%
NIKKEI 225	28,547	1.32%	7.82%	0.25%

				% Change
Index name	YTW	Spread	Duration	Week	Month	YTD
U.S. TREASURY	3.13%		6.59	-0.09%	0.20%	-8.60%
U.S. AGGREGATE	3.62%	+49 bps	6.68	0.24%	1.01%	-8.89%
U.S. CORPORATE INV. GRADE	4.43%	+130 bps	7.87	0.60%	1.83%	-11.87%
U.S. CORPORATE HIGH YIELD	7.43%	+430 bps	4.63	0.94%	5.85%	-7.67%
U.S. MUNICIPAL BOND INDEX	2.87%		5.64	-0.08%	0.98%	-6.76%

Click here to read last week’s Market Note (8/8).

SOURCES

¹ Source: FactSet (chart)
² Source: Bloomberg

Disclosures

OCIO is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.

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This document was created for informational purposes only; the opinions expressed are solely those of OCIO and do not represent those of Hightower Advisors, LLC, or any of its affiliates.