No Fireworks for Markets

Investment Insights: Market Update
  • Fed funds futures are pricing in a key rate of 3.3 percent by year-end but are now including rate cuts as early as March or May next year.
  • While the recession debate continues, Main Street may be feeling most of the squeeze.
  • Crude oil falling under $100 per barrel may be beneficial to consumers but may also herald lower spending.
  • Economist consensus reflects a year-over-year increase in inflation for June.

Financial markets remain turbulent as investors continue to assess whether the US and global economies will weather higher inflation and rising interest rates. Many have been looking to the Federal Reserve, which released the minutes of its June meeting today, for direction. However, the transcripts did not reveal any significant new information as officials agreed that raising rates for longer will be warranted to prevent inflation from becoming further entrenched. The minutes did not include any mention of the word “recession.” While policymakers seem to be reaching consensus on the path for rates, a growing divide is appearing in the markets. Fed funds futures are pricing in a slightly lower key rate of around 3.3 percent by year-end. However, investors are now betting that the Fed will need to reverse its course on rates and begin cutting as early as March or May next year.

While Wall Street talking heads debate whether a recession is looming, Main Street may be feeling most of the squeeze. Consumers could already be cutting their budgets and pulling back on expenses as higher prices take their toll. Given that the consumer is a substantial portion of US GDP growth, consumer spending is a strong and reliable signal for the direction of the economy. Even oil—which has been a hot-button issue for months due to record-high gas prices—may be showing signs of weakening as crude prices fall under $100 per barrel. Interestingly though, while lower oil prices should benefit the consumer—and may also help with inflation—it could be used as an indication of lower spending.

Federal Reserve officials will need to keep a close eye on consumer data to ensure that hikes don’t lead to any major disruptions in spending and consumer activity, which would likely lead to a recession. That “hard landing” is what policymakers are desperately trying to avoid, though they are walking a fine line between controlling inflation and keeping economic growth positive. While employment data continues to be a main focus, clearly, inflation numbers are front of mind. The Consumer Price Index reading for June is slated to be released next week, and economists expect the year-over-year rate will reach 8.8 percent, slightly above the surprise 8.6 percent from May. While that shouldn’t be unexpected for investors, many are keeping their fingers crossed that the gauge has peaked and will be on its way lower soon.

Financial market data for various time periods covering global asset classes.  Data as of July 5, 2022.

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[Contributors Section]
Cyrus Charna
Investment Strategy Officer
Ben Baier
Lead Investment Officer
Wade Balliet
Chief Investment Adviser