Global equity markets finished lower for the week. In the U.S., the S&P 500 Index closed the week at a level of 4,228, representing a decrease of 1.16%, while the Russell Midcap Index moved 2.27% lower last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -2.90% over the week. As developed, international equity performance and emerging markets were lower returning -2.18% and -1.47%, respectively. Finally, the 10-year U.S. Treasury yield moved higher, closing the week at 2.97%.
The most important economic data releases last week were concentrated on Wednesday. Market participants were focused on both July retail sales totals and the July Federal Open Market Committee (FOMC) meeting minutes. This data will be added to our continuing analysis of the status of the domestic economy and future potential monetary policy. Investors are most interested in determining the size of the near-certain rate hike at the Fed’s September meeting, in addition to the two final FOMC meetings of the year in November and December.
The U.S. Census Bureau’s advanced estimate of July sales volumes for retail goods and food services found consumer spending totaled approximately $683 billion for July, essentially matching the sales total for June and 10.3% greater than the totals for July 2021. Declining gas prices throughout July allowed consumers to free up resources to increase purchases of other consumer goods. This dynamic and vibrant jobs market could allow consumer spending to remain strong throughout the rest of 2022.
Also, minutes from the most recent Fed meeting were released on Wednesday. The minutes verified that Fed Officials are not considering pulling back on interest rate hikes until inflation comes down substantially. “With inflation remaining well above the Committee’s objective, participants judged that moving to a restrictive stance of policy was required to meet the Committee’s legislative mandate to promote maximum employment and price stability,” the minutes stated. Market participants are trying to determine what “restrictive stance” means in terms of future rate increases.
Several Fed officials made statements on Thursday and Friday last week following the release. On Thursday, St. Louis Fed President James Bullard, one of the most hawkish policymakers, urged another 75 basis-point move for the September meeting, while Kansas City’s President Esther George struck a more cautious tone. Both Bullard and George are voting members of the FOMC.
On Friday, Federal Reserve Bank of Richmond President Thomas Barkin said the central bank was resolved to curb inflation, even if that meant risking a recession, stating, “we’re committed to returning inflation to our 2% target, and we’ll do what it takes to get there. There’s a path to getting inflation under control, but a recession could happen in the process.” President Barkin is not currently a voting member of the FOMC.
With the September Fed meeting still over a month away, there will be many more statements from Fed Officials and economic data points to be digested by interested investors in order to try and predict how much higher the Fed may hike interest rates in 2022. As it stands now, according to the CME FedWatch Tool from the CME Group:
• There is a 54.5% probability that the Fed Funds Target Rate will be between 3.00% – 3.25%, and a 45.5% probability that the Fed Funds Target Rate will be between 2.75% – 3.00% after the September 21 meeting.
• There is a 49.5% probability that the Fed Funds Target Rate will be between 3.25% – 3.50%, a 30.2% probability that the Fed Funds Target Rate will be between 3.50% – 3.75%, and a 20.3% probability that the Fed Funds Target Rate will be between 3.00% – 3.25% after the November 2 meeting.
• There is a 46.8% probability that the Fed Funds Target Rate will be between 3.50% – 3.75%, a 27.2% probability that the Fed Funds Target Rate will be between 3.75% – 4.00%, and a 23.3% probability that the Fed Funds Target Rate will be between 3.25% – 3.50%, and a 2.7% probability that the Fed Funds Target Rate will be between 3.00% – 3.25%after the December 14 meeting.
Please note: The Fed Funds Target Rate is currently between 2.25%-2.50%.
Investors should consider all the information discussed within this market update and many other factors. However, with so much data and so little time to digest, we encourage investors to work with experienced financial professionals to help process all this information to build and manage the asset allocations within their portfolios consistent with their objectives, timeframe, and tolerance for risk.
Best wishes for the week ahead!
The Consumer Price Index and Producer Price Index are sourced from the Bureau of Labor Statistics. Equity Market and Fixed Income returns are from JP Morgan as of 8/19/22. Rates and Economic Calendar Data from Bloomberg as of 8/19/22. International developed markets are measured by the MSCI EAFE Index, emerging markets are measured by the MSCI EM Index, and U.S. Large Caps are defined by the S&P 500 Index. Sector performance is measured using the GICS methodology.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.