Hope all is well with you. A rally on Friday wasn’t enough to offset the stock market’s rough start to the week. The major U.S. indexes recorded small declines, falling for the 12th week out of the past 15. Snooki was in the news this week for inadvertently getting herself involved in the Senate race, as such I have broken down this week’s update using the creed of Jersey Shore.
Like a weightlifter pushing their limits at the gym, inflation is maxing out. After climbing to an annual rate of 8.6% in May, the Consumer Price Index rose to 9.1% in June, the highest level since November 1981. Core inflation, which better reflects the underlying inflation trend because it excludes the more volatile food and energy prices rose at a 5.9% pace over the past year, down slightly from the 6.0% pace reported for the past month. That makes three straight months where core inflation has cooled from its high of 6.5% in March. Inflation is still present everywhere with two-thirds of the CPI components rising more than 5%. However, it’s not as bad as it seems because core inflation is dropping albeit at a slow pace and since June commodity prices have begun to fall. Oil is down 22% from its peak, natural gas is down 28%, copper is down 34%, lumber is down 62%, and wheat is down 44%.
Retail sales are still managing to tan despite a sky full of storm clouds. U.S. retail sales rose 1.0% in June and came in above expectations despite surging inflation and negative consumer sentiment readings. A handful of major U.S. banks kicked off earnings season with mixed results. It is still early in the earning season, but the retail sales numbers suggest corporate earnings might be better than expected as it seems consumers are still spending. The labor market remains strong, if earnings reports are decent and inflation continues downward it will be possible to see the stock market start to recover before the end of the year.
It’s not all positive news, there are some areas that need to be cleaned up. The yield curve inversion has deepened. The yield of the 2-year U.S. Treasury bond remained above the yield of the 10-year bond, and the gap is getting bigger. The 2-year yield closed at around 3.13% on Friday and the 10-year at 2.93%. A yield curve inversion is often seen as a sign that economic trouble is around the corner, as past inversions have often preceded recessions. However, what’s different is that the market already dropped prior to the inversion. Stocks are already in a bear market. Over the past four decades, the stock market continued to rise for two months to more than a year after the first inversion. The drop in the market has probably priced in most of the trouble an inverted yield curve normally predicts.
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