Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.
Seems like summer vacation gets shorter every year. Both my kids went back to school last week with our older one starting 7th grade and the younger beginning 3rd. Switching the mindset away from summer vacation mode has gone surprisingly smoothly so far. Almost all the classroom covid precautions are winding down, so things are seemingly just about back to normal.
Moving on to markets - the stock market snapped a four-week winning streak on Friday with the S&P 500 falling 1.2%. The tech-heavy NASDAQ took the brunt of the pain as yields on the 10-year Treasury came within a hare’s breath of touching 3%.
The Federal Reserve (Fed) continues to emphasize the price stability portion of its dual-mandate, and as a consequence is clearly willing to risk recession in order to stamp out inflation. Both the labor market and wage growth remain far too strong for the Fed to pivot just yet. However, we are starting to see signs of softening. To wit, a recent survey by PwC showed half of companies are planning layoffs. The survey goes on to show that 80% of employees are afraid of losing their jobs during the next recession. New and used car prices are finally coming down as well. Dealer margins tripled during the covid crisis, so it is good to see this major source of inflation starting to cool.
A lot of financial tightening has happened already. Led by the Federal Reserve, global interest rates increased again last week and have been increasing for 16 months. Money supply growth, which has a very high correlation with inflation, has been slowing for 17 months. The US dollar has been trending higher for 13 months. And mortgage rates surged a whopping 3% over the past 17 months, causing housing to weaken significantly.
To summarize, the Fed will have to slow down from the aggressive 75 basis point rate hikes in our opinion. The global economy is weakening, and is probably entering a recession, with the Eurozone GDP -1%, or worse; the US +1%, and China soft. While we stand by our assertion that we have reached peak inflation, that is definitely not mission accomplished. There is strong evidence demand is slowing, but until supply catches up, the required medicine to get inflation under control is to continue to crush demand – expect financial conditions to continue to tighten.
This week we will see a good deal of key economic data starting with Tuesday’s Manufacturing PMI. We are expecting Manufacturing PMI to drop to 49.0. Any number below 50 indicates contraction. On Wednesday, Durable Goods Orders will come out, which should climb a moderate 0.4%. New home sales probably slipped to a 570,000 pace in July. Mortgage applications and pending home sales releases have been in a slowing trend.
Aug 22 – Aug 26
Date
Indicator
Period
Aug 22
Chicago Fed national activity index
Jul
Aug 23
S&P U.S. manufacturing PMI (flash)
Aug
Aug 23
S&P U.S. services PMI (flash)
Aug
Aug 23
New home sales (SAAR)
Jul
Aug 24
Durable goods orders
Jul
Aug 24
Core capital equipment orders
Jul
Aug 24
Pending home sales index
Jul
Aug 25
Initial jobless claims
Aug 20
Aug 25
Continuing jobless claims
Aug 13
Aug 25
Real gross domestic product. revision (SAAR)
Q2
Aug 25
Real gross domestic income (SAAR)
Q2
Aug 25
Real final sales to domestic purchasers, revision (SAAR)
Q2
Aug 26
PCE price index monthly
Jul
Aug 26
Core PCE price index monthly
Jul
Aug 26
PCE price index year-over-year
Jul
Aug 26
Core PCE price index year-over-year
Jul
Aug 26
Real disposable incomes
Jul
Aug 26
Real consumer spending
Jul
Aug 26
Nominal personal incomes
Jul
Aug 26
Nominal consumer spending
Jul
Aug 26
Trade in goods, advance
Jul
Aug 26
UMich consumer sentiment index (final)
Aug
Aug 26
UMich 5-year inflation expectations (final)
Aug
