Market Monitor: August Update
Headlines and Highlights
- Powell vows to press Fed’s war on inflation: Federal Reserve Chair Jerome Powell reaffirmed the central bank’s resolve to reduce inflation to more normal levels, signaling no imminent letup in its cycle of interest-rate hikes. He said the Fed will do what it takes to bring inflation down to its 2% target, noting in a speech at the Jackson Hole Economic Symposium that history warns against “prematurely loosening” monetary policy. His unyielding comments came despite a deceleration to 4.6% in the core PCE price index, which the Fed uses for its inflation target.
- Rate worries prompt poor market performance: Despite improving economic data, a summer rally in markets reversed course as Fed officials challenged speculation that they could soon pause or even roll back steep rate increases. U.S. large-cap stocks had their worst August (-4.1%) since 2015, while remaining up 8% since mid-June. International developed stocks shed 5.9% for the month amid worsening economic conditions in Europe, where inflation reached a record 9.1% and the euro fell to the lowest level against the dollar in over 20 years. Bond yields surged, sending prices lower, as investors bet on more rate hikes.
- Jobs report reflects economic strength: U.S. employers added more jobs in August (315,000) than expected for a fifth straight month, underscoring the economy’s resilience despite high inflation and a big jump in interest rates. The unemployment rate ticked up to 3.7%. But an important demographic group is increasingly returning to work: The prime-age labor force participation rate surged to 82.8%, not far below the pre-pandemic level and within two percentage points of the all-time high.
Selected Market Returns
Sources: Morningstar, Altair Advisers
- Another substantial rate increase of three-quarters of a percentage point is likely this month as the Federal Reserve continues its anti-inflation campaign unabated. Jerome Powell’s hawkish Jackson Hole speech implied additional increases in the federal funds rate as well as the possibility rates may remain elevated for some time. It is still possible that rate hikes are reduced if the Fed sees more persistent evidence that inflation is moderating – a scenario that would likely be bullish for stocks.
- Bonds as well as stocks have been buffeted by the Fed’s tighter monetary policy but now appear to have largely priced in the additional rate hikes suggested by Powell’s speech. Yields have risen higher with the federal funds rate, sending bond prices lower. We do not expect yields to increase substantially from current levels because growth constraints ultimately will limit the number of additional rate hikes the Fed can impose.
- Inflation finally appears to be trending downward as lower energy prices and higher rates have an impact. We expect it to continue declining for the rest of 2022 while still remaining above historical norms throughout 2023.
- A string of upbeat data releases in August reflected a still-healthy U.S. economy despite concerns about growth, inflation and the housing market. Besides the slowing pace of consumer price rises, the latest indicators for manufacturing activity and job openings showed gains and the Atlanta Fed’s widely watched GDP tracker now estimates solid (2.6%) growth for July through September following back-to-back quarterly declines.
- U.S. consumers continue to weather the economic downturn well, lessening the risk of a near-term recession. A measure of consumer confidence rose to a three-month high last month as gasoline prices fell and consumer spending remained resilient despite declines in purchases of autos and gas.
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