From the desk of Vance Howard:
After Fed Chair Powell’s speech last week, he sent the markets into a tailspin. We are now oversold; the markets are trading in sawtooth patterns which is stocks moving higher and then pulling back as traders take part of the gains and resetting. We never expected a V-shaped recovery. I stated last week “The odds of us retesting the July lows are very low and the odds of volatility scaring investors is very high.” and that has been the case. We are sitting on a lot of cash, and if the market continues to sell off, we will likely hit some stops and will build up even more cash. Markets like this are extremely volatile, and the short and intermediate-term trend as identified by the HCM-BuyLine® is weakening. However, the VIX (Volatility Index) is overbought, indicating that a relief rally could be in the making. As always, we will monitor for any adjustments to the portfolios.
The Personal Consumption Expenditures (PCE) Price Index fell 0.1% in July, its first decline since April 2020. Energy was a big driver, down 4.8% for the month. Food prices, however, increased 1.3%. Core PCE, which excludes energy and food, ticked up 0.1%, the smallest gain since November 2020, and below the consensus of 0.2%.
On a y/y basis, PCE inflation eased to 6.3% from a peak rate of 6.8% in the previous month. With energy price growth moderating, the PCE price index for nondurable goods slid to 11.8% y/y from 13.0% y/y. But slower headline inflation was about more than just energy. Durable goods price growth continued to ease, down to 5.6% y/y, the least since April 2021, while services price growth edged down to 4.6% y/y from a peak rate of 4.9% in the month before. Core PCE inflation, which had reached a cycle high at 5.3% y/y back in February, eased to 4.6% y/y last month, the lowest rate since October 2021, and below the consensus of 4.7%.
Even though inflation has backed off from recent highs, it is still historically elevated, with headline inflation running close to its highest level since 1982, and the core near its highest level since 1989. It is still well above the Fed’s average inflation target of 2.0%, keeping monetary policy in restrictive territory. While a data-dependent Fed will not pre-commit to a set number or size of rate hikes, we continue to expect a terminal fed funds rate of 3.50%-3.75% either late this year or early next year, as Joe Kalish discussed in the 8/25/2022 Fixed Income Focus. At that time, the Fed may reassess its policy progress and impact on the economy, but talk of a hard pivot to rate cuts seems premature, given the uncertainty around the path of future inflation and the remarks by Chair Powell at the Jackson Hole Summit on August 26th.
Vance Howard
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