Stock markets are up again this week, marking their longest winning streak since November 2021 - Stocks surged after the July CPI report was released on Wednesday. The Consumer Price Index, the best indicator of inflation, showed that consumer prices rose 8.5% in July from last July. While still near a 40-year high, it was the lowest reading in three months, down from 9.1% in June and 8.6% in May. This validated experts’ opinions that inflation had peaked in June and was moderating. Many believe that the Fed is about to moderate the size and frequency of its key interest rate hikes, which affect short-term rates. Fewer fears of inflation drive long-term rates lower. In fact, mortgage rates have dropped about one full percentage point since peaking at over 6% in the middle of June.
The Dow Jones Industrial Average closed the week at 33,761.11, up 2.9% from 32,803.47 last week. It is down 7.1% year-to-date.
The S&P 500 closed the week at 4,279.96, up 3.2% from 4,145.19 last week. The S&P is down 10.2% year-to-date.
The NASDAQ closed the week at 13,047.19, up 3.1% from 12,657.55 last week. It is down 16.6% year-to-date. It was down 30% in mid-June.
U.S. Treasury bond yields higher this week - The 10-year treasury bond closed the week yielding 2.84%, almost unchanged from 2.83% last week. The 30-year treasury bond yield ended the week at 3.12%, up from 3.06% last week. We watch bond yields because mortgage rates often follow treasury bond yields. Unfortunately, on Friday after the release of the July job report yields jumped higher.
Mortgage rates – The Freddie Mac Primary Mortgage Survey reported that mortgage rates as of August 11, 2022, for the most popular loan products were as follows:
The 30-year fixed mortgage rate was 5.22%, up from 4.99% last week.
The 15-year fixed was 4.59%, up from 4.29% last week.
The 5-year ARM was 4.43%, up from 4.24% last week. Rates dropped after the July CPI report was released on Wednesday. Rates will be lower in next week’s survey.
The biggest piece of data this week was CPI, and it came in cooler than expected at 8.5% year over year. Still, 8.5% increase in the topline CPI number is too high of inflation for the economy. There was plenty of Fed speak this week and here is what we learned this week from those speakers; July's CPI is not a game changer; September we will see a 50 bps or 75 bps hike; data dependent doesn't mean poised to pause; and there remains a lot of tightening to be accomplished before the Fed is ready to declare victory on inflation. With the good data we saw this week, the reason the 10-year is at 2.89% at the end of the day on Thursday is due to the Fed speak and the market realizing that rates will need to be higher for longer before the Fed will declare a victory on inflation. That said, the market is coming around to believing that the Fed may achieve a soft landing, which is a good sign for the economy. That said, plenty of uncertainty out there and there is plenty of volatility in the markets.
CPI in July came in cooler than expected, with a headline flat on the month, and the core measure up +.3%. Year over year growth in the headline index dropped from a prior +9.1% to now +8.5%, while the core remained steady at +5.9%. Within the report, food (+1.1%) and shelter (+.5%) continued to run on the hotter side, keeping pace with recent trends. However, energy prices are telling a different story, seeing a strong pullback, down -4.6% on the month. Other core numbers include a -.5% decline in transportation services, -.1% in apparel, and a -.2% decline in education/communication. On the autos side, while new vehicles climbed by +.6%, that was mostly offset by a -.4% decline in used vehicles. Bottom line is that this report will bode well with Fed officials and shows some broad-bases slowdowns in core sectors.
Initial Jobless Claims
Initial jobless claims rose by +14k to 262k for the week of August 6th vs. the prior downwardly revised print at 248k (was 260k). Headline claims are now the highest they have been since November 2021 when they sat at 265k. The 4-week moving average on headline claims is now at 252k, a decline from the revised print of 247.5k last week (was 254.75k). Continuing claims, which lag by a week, rose to 1.428mln from last week's revised 1.42mln (was 1.416mln). Continuing claims are the highest since April 2022 when they sat at 1.474mln.
The Producer Price Index (PPI) fell -.5% on headline, with the core measure (ex-food/energy) up +.2%, and the core + trade services index also up +.2%. This was the first negative headline (all items) since April 2020 and is now tied for the slowest ex-food/energy/trade figure since November 2020. The year over year numbers are now down fairly significantly with the all-items index at +9.8% from a prior +11.3%, and the ex-food/energy/trade core measure down from +6.4% to +5.8%. The goods index shrank -1.8% on a +1.0% gain in foods but a -9.0% drop in energy. The BLS noted that 80% of that drop was down to a 16.7% decline in gasoline prices. If we look at prices for goods minus foods and energy, we see an increase of +.2%. On the services side, the index ticked up +.1%, with the key trade services index rising +.3%. Intermediate demand numbers were across most sectors as well with the overall index for processed goods dropping -2.3%, and the unprocessed goods index falling -12.4%. The services index within this category also rose by +.1%, as the trade index was down -.4%. Overall the weaker inflation readings on the wholesale side join up with the CPI report on the consumer side, both showing some cooling of prices.
The preliminary report from the BLS on labor productivity slumped to 4.6% in Q2, seeing output declining by 2.1%, and hours worked increasing by 2.6%. Unit labor costs in the nonfarm sector increased by 10.8% in Q2, reflecting a 5.7% increase in hourly compensation. The annual rate of increase is now at 9.5%, making this the largest four-quarter increase since Q1 1982. Overall, looks like compensation has grown faster than initially expected, with signs of an unsustainable hot economy and uncontrolled labor market expansion.