Wentz Weekly Insights
Chairman Powell Toughens Tone on Inflation in Jackson Hole Speech
Two consecutive quarters of negative GDP growth and a better reading on inflation was enough reason for the markets to believe the Fed would make a “pivot” in its policy stance by the first quarter of next year, one (of several) reason we saw a nearly 20% rally off the lows from June to the recent highs. The speech by Jerome Powell at the Jackson Hole Economic Symposium last Friday did not consist of anything we did not already know but based on the markets reaction one would think he gave a gloomy view on the outlook or a more aggressive stance on higher interest rates. Following his speech, short-term Treasury yields moved higher while stocks moved dramatically lower to end the week down 4%.
Since the Federal Reserve raised rates by 75 basis points (each basis point equaling one-hundredth of one percent) in its recent July 27th meeting, we have seen many Fed policymakers give public speeches and remarks on policy moving forward. The message has been consistent, even after the July inflation report showed inflation had cooled in the month – the central bank will maintain its hawkish stance by steadily increasing interest rates to a more restrictive stance until they are completely convinced inflation is coming down. Jerome Powell gave the same message, but markets sold off anyway.
If there was anything different it was that Chairman Powell was more direct and more tough in his tone. In fact, he stated in his opening that his remarks were meant to be “shorter… narrower… and more direct,” telling us he wanted his message to be as clear as possible for the markets. Powell used the speech as an opportunity to recalibrate market expectations. The Federal Reserve was given two mandates by Congress – price stability and maximum employment – and Powell focused only on bringing back price stability.
Powell said it will take time and all but said it will require a recession to get inflation under control which will include below-trend growth and softening of the labor market. This might have been the first instance where Powell was more direct in saying a recession would be needed to bring back price stability. Powell acknowledged, like he has before, failing to bring prices down would cause far greater pain because when inflation becomes entrenched it hurts everyone with the pain felt most to those at the lower end of the income scale, an area where the economy has seen strong gains over the past two years.
Regarding current data, Powell said the economy continues to show strong underlying momentum though the data has been mixed, with the labor market strong but out of balance. The lower inflation reading in July was “welcoming,” but the one report “falls short” of what the Fed wants to see. The current level of interest rates was noted as being in line with the longer-run neutral rate, but with inflation as high as it is, rates need to be in a restrictive stance “for some time” which requires additional increases. The remainder of the speech Powell talked about how lessons have been learned in different inflationary periods in history and how it shows the risks in prematurely loosening policy, pushing back against what the market has started to expect after the softer July inflation report.
In the end, the speech appeared to be an attempt to bring markets expectations back in line with where the Fed wants them. It will require a “forceful and rapid” path of rising rates to an above-neutral level to moderate demand so it is better aligned with supply until policymakers are confident and completely convinced they have achieved price stability. This will mean slower growth and eventually a recession, or hard landing, and recall from past newsletters – this is where defensive positions can offer less volatility and less downside exposure.
Week in Review:
Headlines heading into Monday included the People’s Bank of China lowering its one-year and five-year loan prime rates while a European Central Bank official said it must keep raising rates regardless of a recession risk along with increasing tensions between Russia and Ukraine after a weekend car bombing that killed a Putin ally. Energy prices in Europe continued to rise with natural gas hitting a record high after Russia said it would stop flows through the Nord Stream pipeline for a three-day maintenance. In addition, crude oil saw higher volatility after the Saudi Energy Minister said OPEC may be forced to cut production to help stabilize markets due to the disconnect between futures market and fundamentals. There was a further flattening of the yield curve as short-term Treasury yields rose over expectation of a more hawkish Powell on Friday. Stocks maintained downside momentum and risk off mode to start the week with all sectors lower again, growth underperforming value, and the S&P 500 down 2.14%.
Headlines were quiet again Tuesday, with several earnings such as Zoom Video that missed expectations. New home sales for July was a large disappointment to the downside with the slowest sales pace since 2016 with lower affordability from higher home prices and interest rates to blame. Stocks struggled again with energy the clear standout winner over additional reports of a potential OPEC production cut that sent crude oil 3.7% higher. The S&P 500 finished down 0.22% while the NASDAQ was unchanged.
Stocks were little changed heading into Wednesday’s open. Fed speak included once dove Minneapolis Fed President Kashkari giving a more hawkish stance in supporting more tightening and higher rates to prevent un-anchoring in inflation expectations. However, the biggest news of the day was President Biden announcing the pause on student loan repayments will be extended to the end of the year while erasing up to $20k of student loan debt per borrower making under $125k. Oil was volatile as the U.S. rejects Iran’s conditions in the nuclear deal while stocks were higher, all sectors gaining, with the S&P 500 up 0.29% although breadth was much weaker than the gain suggests on the lowest volume since December 2021.
Markets received supportive news from China that it would provide additional stimulus for its economy worth around $146 billion with a large portion for its troubled property sector, but additional Fed speak indicated we don’t know if we hit peak inflation and there is still a lot of work that’s left. It was a better day for stocks with all sectors higher as the S&P 500 gained 1.41%.
Markets were little changed Friday morning, with data showing Americans’ income rose 0.2% in July while spending rose just 0.1% despite higher prices. After Fed Chairman Powell delivered his much anticipated speech in the morning, markets moved lower and remained in risk-off mode for the remainder of the day settling at the lows of the day. Powell’s message was hawkish, focusing on inflation and the potential consequences the economy may face in order to achieve price stability. There was heavy declining volume on the day with all sectors and all indices lower with the S&P 500 down 3.37%.
Markets were lower for the week, with it being a more quiet week until Powell’s Friday speech that put investors in risk-off mode and sent stocks much lower for the week and shorter term yields higher, flattening the yield curve. Oil rose almost 3% for the week over the prospects of a production cut by OPEC. The major indices finished the week as follows: Russell 2000 -2.94%, S&P 500 -4.02%, Dow -4.22%, NASDAQ -4.44%.
Recent Economic Data
- Housing data continues to disappoint to the downside with the July sales pace of newly built homes down 12.6% in the month to a seasonally adjusted annualized rate of 511,000 for the lowest rate since 2016. This is 30% below the sales rate a year ago, below the peak of 1.036 million homes 23 months ago, and compares to the 43% decline seen during the first 23 months of the housing crisis. Supply of newly built homes for sale in July was 464,000, up 3% in the month, 28% from a year ago and 65% higher than the low of 281,000 21 months ago. The supply would last 10.9 months at the current sales pace, better than 9.2 months in June and the highest monthly supply since the housing crisis. The median sales price of a new home was $439,400, up 6% in the month but still 4% below the record high in April.
- New orders for durable goods were virtually unchanged in July, lower than a 1.0% increase expected, and follows four consecutive months of increases. Excluding the volatile transportation category which tends to see large swings, orders rose 0.3% in the month and are up 7.1% from a year ago, versus the headline number up 10.8% over the same period. Shipments of non-defense capital goods excluding aircraft, a direct input to GDP, rose a solid 0.7% in the month
- For the week ended August 20, there were 243,000 jobless claims, down 2k from the week prior, with the four-week average moving 1.5k higher to 247,000. Continuing claims was 1.415 million, down 19k from the week prior with the four-week average at 1.425 million.
- The first revision on second quarter GDP was slightly better than the advanced estimate with GDP decreasing 0.6% annualized in the second quarter, below that 0.9% decline in the advanced estimate. The revision was due to upward revisions on consumer spending and inventory growth, offset by a downward revision to residential investments (housing). The GDP price index rose at an 8.9% annual rate, up from 8.7% in the advanced estimate from a month ago.
- Bureau of Economic Analysis data showed Americans’ income rose 0.2% in July, a fraction of the 0.6% increase expected and follows June’s 0.7% increase. However, digging into the details shows the slower increase was due to a decline in government transfer payments. Wages and salaries were up a solid 0.8% in the month, helping alleviate the pressure from higher prices. Compared to a year ago, wages and salaries are 11.6% higher while inflation was 8.5%. Meanwhile, consumer spending rose just 0.1% in the month, also well below the expectations of 0.5% and lower than June’s 1.0% increase. Spending on goods fell 0.2% while spending on services rose 0.3% as consumers spend more time on entertainment/travel versus buying things, a trend that will most likely continue. Spending was up 8.7% compared to a year ago but adjusting for inflation was up just 0.2% over the past 12 months reflecting how consumers are being forced to spend more to buy less. The savings rate was 5.0%, matching June’s rate for the lowest savings rate since 2004 as consumers continue to spend down savings. Finally, the Fed’s preferred measure of inflation, the PCE price index, declined 0.1% in July for its first decline since April 2020, but remain 6.3% higher from a year ago while core prices (excludes food and energy) rose 0.1% in the month and 4.6% from a year ago.
- The University of Michigan’s consumer sentiment survey shows sentiment improved in August, after reaching an all-time low in June, as energy prices eased and markets recovered somewhat. The index on consumer sentiment was 58.2, up from 55.1 in the mid-month survey and 51.5 from July’s survey. More importantly for the current environment, consumer’s expectations on inflation over the next year was 4.8%, down from 5.2% in July, while the five-year expectation held steady at 2.9%.
- Tesla began trading at its split adjusted price last Thursday after shares saw a 3-for-1 stock split. Separately, the company said it would be raising the price of its FSD driver assistance software 25% in September.
- After reportedly being looked at by CVS, health analytics platform Signify Health got another boost in its stock price after a report from the WSJ saying Amazon is considering acquiring the company. United Health also emerged with a bid for the company. Signify Health has a board meeting scheduled to evaluate each bid.
- Separately, the Washington Post first reported last week Amazon is planning to shutdown its Amazon Care telehealth business by the end of the year. the business provides virtual health care that was first offered for its own staff, then gained six corporate clients. The report said its corporate customers were not seeing the value of the product.
- After several reports, there is growing speculation OPEC+ will cut production targets at its next production meeting, or even prior to that. Bloomberg first reported that Saudi Energy Minister said extreme volatility and the lack of liquidity in oil futures markets is becoming increasingly disconnected from fundamentals. Cutting production would help stabilize markets due to the disconnect between the futures markets and physical spot market. Later in the week, Bloomberg reported more OPEC members voiced support for Saudi’s comments about curtailing production, making the move more likely. However, the decision may now be driven by the prospects of an Iran nuclear deal that would return Iranian oil to the global market.
- There are still ongoing negotiations on bringing Iran back into the 2015 Iran Nuclear deal. US officials are reviewing the deal. Iran recently dropped some demands in its proposals, including asking the US to remove the Islamic Revolutionary Guard Corps from its terrorist list, with some reports saying the deal is getting closer. Iran has 93 million barrels of oil in storage on tankers across the world and a deal will allow it to offload much of that supply. There is also speculation OPEC’s decision could coincide with the return of Iranian oil to global markets.
- Meanwhile, Department of Energy data showed the U.S. exported more than 11 million barrels per day (bpd) of crude oil and products last week. This is the most the U.S. has ever exported since data began in 1991. Much of the increase has been a result of shipments to Europe as it replaces Russian oil with an additional 300k bpd being shipped since March to a record 1.6 million bpd in August. The article noted the increase is expected to continue with traders expecting more U.S. oil being exported to Europe into 2023.
- In a speech on Wednesday afternoon, President Biden announced the Administration will cancel up to $20,000 in student loan debt per borrower that could affect as many as 20 million Americans. The details show Pell Grant recipients would see up to $20,000 in debt cancelled and up to $10,000 for others that had income under $125,000 for the year, or under $250,000 for married couples. The announcement also included extended the pause on student loan repayments by another four months to December 31. The Department of Education already has income data on nearly 8 million borrowers but lacks the data on the remainder. Those individuals will have to apply, with details to be announced later. More importantly over the longer-term, the administration also announced a new program to make debt more manageable with an income-based repayment plan that would cap monthly payments at 5% of a borrower’s discretionary income over $30,000 and forgive these loans after 20 years of repayments.
- Democrats have seen a boost in polling ever since the Supreme Court removed the right for women to have an abortion, and we learned more of how much in the recent special elections and primary elections last week. The biggest race, in a New York swing district for a vacant House seat, Democratic Pat Ryan narrowly defeated Republican Marc Molinaro. The political implications were big for this race, but it will not matter longer term as the seat will disappear in the fall when a new congressional map is effective. With Midterm elections coming up, where Republicans were expected to take control of the House and possibly Senate, the results are becoming a little more uncertain as Democrats get a boost from the abortion ruling, a legislative win with climate change initiatives in the Inflation Reduction Act, while Republicans are hoping Biden’s low approval rating, high inflation, and a slowing economy help their chances for a change in Washington.
- On Friday, Reuters reported the U.S. Securities and Exchange Commission and Chinese regulators reached a deal to end a dispute that could have delisted many Chinese companies from U.S. exchanges. Chinese regulators have long prevented U.S. auditors from accessing financial statements of Chinese companies over what it said was national security concerns. The report says the deal gives the Public Company Accounting Oversight Board full access to Chinese audit working papers with no redactions, the right to take testimony from audit company staff in China, and discretion to select which companies to inspect. No deal meant more than 200 Chinese companies would be at risk from being banned from U.S. exchanges.
Did You Know…?
The Cost of Forgiving Student Loans
The Biden Administration announced the cancellation of up to $20,000 in student loan debt per borrower. Details show those that were Pell Grant recipients could see up to $20,000 in debt cancelled, while others will see up to $10,000 cancelled. The cancellation applies to those single with income under $125,000 and those married with income under $250,000 for the tax year. The announcement also came with the extension of the student loan payment pause by another four months to December 31. The program will discharge an estimated $350 billion to $400 billion in student loans, while the aggregate effects would boost GDP 0.1% from higher incomes, but also boost inflation by an estimated 0.3% at a time inflation is already running hot. The plan includes other initiatives including a new income based repayment plan. The Biden Administration says the plan is expected to cost $240 billion over the next ten years, while The Committee for a Responsible Federal Budget estimates between $440 to $600 billion and while Wharton estimates near $1 trillion.
The Cost of Clean Energy
The recently passed climate bill in the U.S., combined with a similar climate plan in Europe referred to as RepowerEU will together provide more than half a trillion dollars worth of subsidies into the market for clean energy, with the most common being credit for electric vehicle purchases. The bills will also remove a chunk of financing risk associated with building renewable energy projects. According to the International Energy Agency, annual clean energy investment worldwide will need to triple by 2030 to $4 trillion to meet the commitment of net-zero carbon emissions by 2050.
Economic & Market Outlook Meeting
Inflation, Recession, Stagflation
What’s Going On?
Tuesday, September 6 – 12:00 pm – WFG Auditorium in Hudson, OH
Thursday, September 8 – 6:00 pm – WFG Auditorium in Hudson, OH
Tuesday, September 13 – 6:00 pm – WFG Auditorium in Hudson, OH
**Do not forget to RSVP as we are nearing capacity for each time slot!**
Wentz Financial Group is bringing back its Economic and Market Outlook Seminars the beginning of September! Join us as we recap the first half of the year, explain how we got to where we are today, as well as give our expectation and forecast on the economic and market environment and how that will affect portfolios in the challenging months ahead. We will have three seminar times, one during the lunch hour and the other two in the evening. Please RSVP by responding to this email or by calling the office at 330-650-2700. Seat are limited for each event and will be on a first come first served basis. A buffet style meal will be served approximately 30 minutes before each event.
Career Development Day
Thursday, December 22, 2022 – All Day
Do you know someone in high school or college looking to get real life work experience from the finance industry? Wentz Financial Group will be hosting its 2nd Career Development Day at our office on December 22nd. The day will not only be for those looking to get a first look into financial services field but is open to any student wanting to get their feet in the door of the professional world. Don’t forget to RSVP by responding to this email or calling the office at 330-650-2700.
The Week Ahead
It is a holiday shortened week with bond and stock markets closed Monday for Labor Day. It will be a quieter week on the economic and earnings calendar. On the economic calendar notable data releases include the ISM services index on Tuesday, trade data Wednesday, and jobless claims on Thursday. There will be plenty of Fed speak with public appearances from Fed policymakers just about every day this week with the highlight being Jerome Powell’s speech on monetary policy Thursday morning. In other central bank news, there are several central bank policy meetings across the globe. The European Central Bank meets this week with its policy decision on Thursday where the greatest odds are for a 75 basis point increase in its policy rate. The Reserve Bank of Australia and the Bank of Canada meet as well. On the earnings calendar, notable quarterly results will be released from GameStop, Nio, and Academy Sports Outdoors Wednesday, DocuSign on Thursday, and Kroger on Friday. There are many brokerage conferences this week as well and, as we are a little over half way through the third quarter, could include commentary or updated guidance on the current quarter. Meanwhile, Apple will hold its launch event Wednesday where it is expected to unveil its iPhone 14 lineup that is expected to include four new iPhone models.