The Week Ahead – We’re Having a Heat Wave

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.

The weather in California has been hot, hot, hot. It got so bad, I had a meeting with a colleague last week who felt it necessary to get a hotel room since her house did not have air conditioning. Fortunately, it looks like the worst is behind us. 

Speaking of too hot, the economic data are likely still too resilient for the Federal Reserve (Fed) to take their foot off the brake. On top of another strong employment report for August, unemployment claims fell last week. This all but makes the case for another big 0.75% interest rate hike all but inevitable. Despite data coming in that indicate the Fed has more work to do, equity markets had a strong showing last week, rising 3.7%. Talk of recession has decreased dramatically as economic growth has continued to come in stronger than many expected. Indeed, our best recession indicator, the yield curve, is still positive. Even if we get a 75 basis point hike on the 20^th, it will likely remain positive – if just barely. This indicates slow growth, but not a recession just yet. Third quarter earnings are likely to be solid, and this should help put a floor under equity markets.

We also received some interesting news regarding the war in Ukraine. Over the weekend, reports showed that Russian forces have collapsed in many areas, allowing the Ukrainians to take back large portions of their country. There are also increasing rumors that many of President Putin’s allies are waning in their support. The situation is fluid but could be a positive for the looming energy crisis in the European Union.

This week ahead is going to be pivotal. On Monday, the New York Fed survey of consumer inflationary expectations showed some moderation, reflecting the plunge in gasoline prices, while food prices remain elevated. The big news will be released on Tuesday, which we suspect will be a moderating Consumer Price Index as commodity prices fall and the supply chain continues to normalize. August's NFIB survey of small business owners is expected to show a continuing struggle with labor shortages. Thursday's retail sales report for August will probably be robust, as many consumers are spending more on services such as travel and hospitality. Friday's preliminary September reading of consumer sentiment should continue to rebound with the dramatic fall in the price of gasoline.

Data deck for Sep 12 – Sep 16