Lower U.S. Inflation Supports Stocks, Consumer Goods Firms to Report Earnings
Last Week Review
Global equities ended last week up 2.9%, mostly helped by softer than expected U.S. inflation data. U.S. equities led with a 3.5% gain, followed by a 2.5% gain in developed ex-U.S. equities. Emerging market equities increased 1.7%. The two-year Treasury yield rose 0.02% to 3.24% and the 10-year yield held steady at to 2.83%. Credit spreads fell last week across high yield (-0.20%) and investment grade (-0.09%) bonds. Despite broader concerns on recession, credit spreads have continued to edge lower.
Investors Welcome Lower U.S. Inflation
Inflation rose 8.5% year-over-year in July, which was lower than expected (8.7%) and a notable decrease from 9.1% in June as energy prices declined. Core inflation, which removes more volatile energy and food prices, was 5.9%, falling under the average estimate of 6.1% and even with June inflation. The 7.6% increase in the core Producer Price Index also declined from the prior month, further suggested cooling inflation. Altogether, last week’s U.S. inflation data supported the peak inflation narrative. While this may incrementally ease pressure on the Federal Reserve, the central bank has emphasized a need to see several sequential declines before pumping the brakes on higher rates.
China Inflation Accelerates, Remains Below Target
China’s 2.7% inflation in July also fell below expectations of 2.9% but accelerated from the 2.5% prior level in June. Higher food prices drove most of the increase. Concerns on China inflation pale in comparison with other major regions. However, further acceleration may limit the ability of its government to offset weak demand and COVID-19 headwinds through stimulus.
U.S. Earnings Proving Positive
Corporate second-quarter earnings and outlooks have been more positive than expected. As demand has remained steady, companies are focusing on maintaining profit margins by passing along prices and slowing hiring. So far, aggregate earnings of U.S. companies have risen 8.8% year-over-year on a 14.8% rise in sales, based on 91% of S&P 500 Index companies reporting. Disney beat expectations, benefitting from pent-up travel and leisure demand, along with streaming subscription growth.
China Eases Military Exercises Around Taiwan
China concluded recent military drills following unprecedented exercises in response to U.S. House of Representatives Speaker Nancy Pelosi’s recent visit to Taiwan. China signaled that its exercises had ended in the Taiwan Strait (aside from the regularly scheduled occurrences), but it will likely keep its pressure on the island. We think investors welcomed last week’s de-escalation. However, risks around U.S.-China relations and Taiwan have now likely shifted higher. Investors should continue to evaluate the rather meaningful risks surrounding the issue.
This Week Preview
Fed to Release July Meeting Minutes
The July Fed meeting minutes are scheduled to be released on Wednesday. The Fed has expressed it will be data-dependent moving forward, but investors may still react to the details in the minutes. Signs of cooling inflation have helped lower investor expectations for Fed hikes from year-to-date highs. There are still roughly five more 0.25% hikes expected by investors through March 2023.
Consumer Goods Companies to Report Earnings
A handful of key companies are left to report second quarter earnings. This includes several consumer goods companies, which as a group have reported some margin compression so far. Consumer staples company Walmart (WMT) is set to report on Tuesday. Consumer discretionary companies Home Depot (HD) reports on Tuesday, Target (TGT) on Wednesday and Kohls (KSS) on Thursday.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of August 14, 2022.
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