There is continued evidence of a cyclical slowdown. China has already taken a large hit due to local policy decisions. Europe is dealing with the impact of the Russia/Ukraine conflict. The U.S. is feeling the impact of a Fed that has turned aggressive and is aiming for restrictive monetary policy.
U.S. initial jobless claims were revised slightly higher & remained above their recent low at 231,000 last week. The U.S. manufacturing PMI new orders component moved into contraction territory at 49.2 in June. Construction spending fell -0.1% m/m in May. Vehicle sales remained tepid (and weaker than expected) at a 13.0 million SAAR in June.
The U of Michigan measure of U.S. consumer sentiment was a record low in June. U.S. personal spending rose 0.2% m/m in May, but with PCE inflation up 0.6% real personal spending declined -0.4%.
U.S. real GDP was revised down in the final 1Q reading to -1.6% q/q A.R. Tracking estimates for 2Q fell to -2.1% after the package of weaker data last week.
So, there’s an increasing chance we have 2 consecutive quarters of negative growth in 2022. With this data, the market appears to be considering a Fed pivot to easier policy. But inflation has already spooked numerous central banks. They are unlikely to pivot back quickly. Some like the ECB haven’t even gotten started yet.
True, some commodity prices (eg, copper) have turned sharply lower. There’s been some additional “peak inflation” evidence (eg, the core PCE deflator at 0.3% m/m in May), but inflation is not low. “Peak” is different from “mission accomplished.” Even with weaker data on growth, concerns about “sticky” inflation (rents, wages) are set to push policy toward a restrictive stance.
Interest-rate sensitive sectors in the U.S. (eg, housing, capex) are starting to turn down, though not all the data has been negative (eg, pending home sales & durable goods orders both up +0.7% m/m in May). Home price gains have been booming with more than 20% y/y growth through April.
Fed Chair Powell has noted that factors beyond the Fed’s control (eg, geopolitics, supply-chain issues) will determine whether they can bring inflation down to the 2% target with the labor market still strong.
Bottom line: the U.S. economy is slowing down, to rebalance demand with restricted supply & remove inflation pressure. The Fed is starting to get what it wants, based on weaker economic data.
With financial conditions tightening, the domestic labor market remains key. From here (at full employment) U.S. job growth should be slowing. Slowing corporate profit growth & weakening business confidence (eg, the Business Roundtable survey) also argue for a reduction in business spending generally.
There’s still the job openings > unemployed cushion, and residual cash from the previous fiscal stimulus. Some U.S. states are sending out additional checks as well. But the risks to growth remain skewed to the downside, and corporate earnings should be under pressure in our opinion.
Source: Strategas
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.
Sincerely,
Fortem Financial
(760) 206-8500
team@fortemfin.com
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