Weekly Market Commentary June 18-24
Markets pause as summer officially starts and Powell weighs in
After reaching 4,400 points at breakneck speed, the S&P naturally took a few steps back last week. Markets have slumped since the last Federal Reserve meeting, as they digested recent gains and consolidated at a new base level. There’s lots of talk that this isn’t really a new market but just another bear market head fake like we had last summer, to which we can definitively, positively, affirmatively say maybe — or maybe not. (How’s that for decisive?)
Last week’s market performance wasn’t surprising, as the rate hoopla receded. Discussions quickly began to revolve around the possibility of the resumption of interest rate increases in upcoming Fed meetings.
Federal Reserve Chairman Jerome Powell kept it short and to the point in his prepared remarks for the semi-annual monetary testimony (often referred to as the Humphrey-Hawkins testimony) last week. He opened with:
“We at the Fed remain squarely focused on our dual mandate to promote maximum employment and stable prices for the American people. My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bring inflation back down to our 2% goal. Price stability is the responsibility of the Federal Reserve, and without it, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.”
[Read the full testimony here.]
Nothing new there, but Chairman Powell acknowledged, “The U.S. economy slowed significantly last year, and recent indicators suggest that economic activity has continued to expand at a modest pace.” Nonetheless, he went on to say, “Inflation remains well above our longer-run goal of 2%.”
Again, nothing new, and Powell did not offer a different signal on the outlook for monetary policy than the one he gave on June 14. In his prepared remarks, Powell said,
“Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year. But at last week’s meeting, considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the Committee to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, we will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
The markets seemed to fret about future hikes when Powell indicated yet again that the prospect of further monetary policy restriction remains. The Federal Open Market Committee (FOMC) median forecast released on June 14 suggests two more rate hikes of 25 basis points (0.25%) this year and that rates will dome down more slowly in 2024 and 2025. About this, Powell said in his June 22 remarks, “We will continue to make our decisions meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks.”
That appears to be Powell’s escape hatch, which he seems to be already prepared to use. It allows for the possibility that rate hikes may not take place, should the data show inflation is improving more than previously anticipated. However, rate cuts are highly unlikely absent other developments that significantly change the outlook — such as the onset of a painful recession just in time for the upcoming election year.
Another risk that Powell and his colleagues are keeping a close eye on is the banking sector. Powell reiterated, “The U.S. banking system is sound and resilient.” But credit conditions have tightened and thus are working alongside higher interest rates to make monetary policy more restrictive. Fed officials are also working to fix the “vulnerabilities” in the banking system that roiled markets early this year. Clearly, the mini crisis is on the Fed’s mind and seems to have them spooked. Even though the Fed didn’t outwardly say anything at its meeting after the Silicon Valley Bank mess, it began to add liquidity back into the system and we had the recent market run-up. Coincidence? Maybe. It doesn’t look like they will raise rates anytime soon, but it also doesn’t seem like they want to cut rates if they can help it. This is the dilemma markets were dealing with last week.
Coming This Week
Last week was short, quiet and negative for markets. The upcoming two weeks will be even less eventful ahead of the Independence Day holiday.
Data this week will include consumer confidence, durable goods, Case-Shiller and FHFA home price index, and new home sales on Tuesday. Mortgage applications, retail and wholesale inventories, State Street investor confidence and the survey of business uncertainty will follow on Wednesday.
The third and final reading of first-quarter 2023 gross domestic product (GDP) will be released on Thursday. The second reading showed small growth of 1.3% year-over-year.
Also on Thursday, we’ll see the latest unemployment claims, corporate profits and pending home sales.
Personal spending and consumer sentiment will close out what should be a quiet day for Wall Street, as everyone heads into a long summer weekend.
Probably the biggest news this week will be around Jerome Powell’s comments during the policy panel discussion at the European Central Bank (ECB) Forum on Central Banking in Sintra, Portugal.
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