The global stock market rally took a step back last week. In the United States,
the S&P 500 fell 1.2% (now down 11.3% year-to-date) while the NASDAQ dropped 2.6% (now down 18.8%
year-to-date). Energy, Utilities, and Consumer Staples were the top performers while Communication
Services and Materials lagged. Overseas, European stocks tumbled 2.6% as concerns about energy
supplies rose while Japanese stocks slid 1.4%. The 10-year U.S. Treasury yield climbed 14 basis
points to 2.98% as investors weighed the prospects for additional Federal Reserve rate hikes.
The Kansas City Fed’s 2022 Jackson Hole Economic Symposium will be the event of the
week. Investors will be looking for clues as to how the Fed intends to wrangle
inflation moving forward. Will policymakers feel obligated to raise rates well into restrictive
territory in order to keep the downward pressure on the economy in place? Or will they express a
desire to be data dependent as concerns rise that the economy may tilt into a recession in 2023?
Fed Chair Powell may attempt to use the symposium to reset the market’s expectations
about future rate hikes. While the Fed may indeed end up slowing the pace of rate
hikes later this year, we doubt the Fed will express any desire to ease policy at this stage
with inflation still running well above the Fed’s 2.0% target and unemployment remaining near
historic lows.
With leading U.S. economic indicators pointing to a further slowing in the economy, we
think that the Fed will need to become more data dependent heading into 2023 if policymakers
are truly aiming for a soft landing.
The next Weekly Market Update will be published on September 12, 2022. We hope
that both our clients and colleagues can use the remaining days of summer for a much-needed
recharge.
Shawn Snyder
Head of Investment Strategy,
Citi Personal Wealth Management
Last Week's Closeof the main usa
stock market indices
S&P 5004,228
(-1.2%index change down
1.2 percent from last week)
DJIAdow jones industrial average33,761
(-0.2%index change down
0.2 percent from last week)
NASDAQ12,705
(-2.6%index change down
2.6 percent from last week)
Wrangling Inflation in Jackson
Hole
The Kansas City Federal Reserve will hold its annual Jackson Hole symposium this week where
policymakers will discuss, “Reassessing Constraints on the Economy and Policy.” Fed officials will
likely cover many topics, but there is only one that matters for financial markets, which is how far
is the Federal Reserve willing to go to wrangle runaway inflation.
While headline consumer price index (CPI) inflation looks like it peaked in July, when energy prices
are excluded, inflation has been running at 6.6% for four consecutive months (see figure 1). That is
probably not the persistent decline that the Fed is looking for. Likewise, when officials look at
the Atlanta Fed’s measures of flexible and sticky inflation, flexible inflation has come down with
energy prices, but so-called sticky inflation continues to rise with the latest print coming in at
5.7% (see figure 2). When combined, we suspect it is too early for the Fed to declare victory on
inflation. Particularly with financial conditions once again loosening with equity markets pushing
higher since mid-June.
Figure 1. U.S. Consumer Price Index (YoY%)
This line chart shows the year-on-year percent change of the U.S. Consumer Price Index
from January 2019 to July 2022.
Sources: Haver Analytics and Citi Global Wealth Investments as of July 2022.
Figure 2. Atlanta Fed’s Measures of Flexible Inflation and Sticky
Inflation (YoY%)
This line chart shows Atlanta Fed’s Measures of Flexible Inflation and Sticky Inflation
year-over-year percent change from 1970 to 2020.
Sources: Haver Analytics and Citi Global Wealth Investments as of July 2022. Note: The
Sticky Price Consumer Price Index (CPI) is calculated from a subset of goods and services
included in the CPI that change price relatively infrequently. Because these goods and
services change price relatively infrequently, they are thought to incorporate expectations
about future inflation to a greater degree than prices that change on a more frequent basis
like energy prices.
The question then becomes whether the Fed should keep raising interest rates and risk tilting the
economy into a recession in 2023 or should they slow down their pace of rate hikes and let the
monetary policy already put in place work through the system and reassess as economic data roll in?
Financial markets seem to think that the latter scenario is the most likely and are now betting that
the Fed will cut rate in the back half of 2023. While a Fed pivot on rate hikes is currently being
viewed as a positive for risk assets like stocks, we worry that the optimism may prove somewhat
overdone if the Fed pivot signals concerns about the economic outlook.
Most economic data continue to point to an economy that is still expanding modestly with the Atlanta
Fed’s GDPNow real-time estimate for 3Q 2022 tracking at 1.6%, but the Conference Board’s leading
economic indicator index suggests a further slowing as monetary policy becomes restrictive. While
the index has sent false recession signals in the past (1996, 1999, and 2016), a continued fall
below zero on a year-on-year basis bears watching as it has tended to occur about 10 months before
the onset of a recession (see figures 3-4). In our view, a recession in 2023 may still be in the
cards if the Fed continues to tighten, which is why the Jackson Hole symposium and the September
FOMC meeting take on even more importance than normal.
Figure 3. U.S. Leading Economic Indicators Index vs. Periods of U.S.
Recession
This line chart shows the U.S. Leading Economic Indicators Index vs. Periods of U.S.
Recession from 1986 to 2021.
Sources: Haver Analytics and Citi Global Wealth Investments as of July 2022. Note:
Shaded regions denote periods of recession.
Figure 4. U.S. Leading Economic Indicators vs. Real Gross Domestic
Product (YoY%)
This line chart shows the U.S. Leading Economic Indicators vs. Real Gross Domestic
Product year-over-year percent change from 1986 to 2021.
Sources: Haver Analytics and Citi Global Wealth Investments as of July 2022. Note:
Shaded regions denote periods of recession.
When it comes to this week’s meeting, we suspect that the Fed is going to take a hawkish tone, even
if they don’t really mean it. It is sort of like threatening to take your child’s toy away to get
them to behave (in this case the markets) even though you may not intend to follow through. With
financial conditions loosening, the Fed may feel the need to tamp down market expectations to get
the economic response that they want, which is a weakening in demand amid a healing in supply
chains. That is the elixir that the Fed is hoping will cure inflation.
Importantly, a soft landing cannot be completely ruled out, but it may require the Fed to “hike and
hold.” Meaning that a pause may be a prerequisite for the recent equity market rally to hold and for
the economy to stabilize before the Fed can move forward with even more rate hikes. Thus far, Fed
officials have not expressed much interest in that approach though. Currently, the dynamic seems to
be more like flying a plane in turbulent air. Everyone is uncomfortable and knows that it will
likely be a bumpy descent, but there is no choice but to land and simply hope for the best (be it a
soft or hard landing).
This lack of clarity is why Citi Global Wealth Investments’ Global Investment Committee (GIC) has
decided to remain cautious despite the solid rally since mid-June. We recommend that investors stay
focused on both quality stocks (those with stable earnings and consistent dividend growth) and
quality fixed income (like U.S. Treasuries). We did, however, recommend adding exposure to
short-duration U.S. Treasuries and investment grade credit at our July meeting. We think that a
2-year U.S. Treasury yield of 3.3% (at the time of this writing) looks attractive for diversified
portfolios. The GIC funded this by reducing its exposure to global natural resource stocks. While we
still think there may be some upside heading into the fall and winter months, energy sector
earnings-per-share (EPS) have averaged an 86% decline from peak-to-trough during the last four
recessions. While we see the odds of a U.S. recession in 2023 evenly balanced at about 50% (the odds
of a recession in any given year are typically about 15%), we think the downside risk for the energy
sector might outweigh the potential upside.
What Should U.S. Investors Watch in the Week Ahead?
Aside from the Fed’s Jackson Hole meeting, investors will get fresh reads on new home sales and the
personal consumption expenditure deflator, which is the Fed’s preferred inflation measure.
Unsurprisingly, new home sales are expected to fall by 2.6% while PCE inflation is expected to dip
from 6.8% in June to 6.4% in July.
Housing has probably been the most immediately impacted industry from Fed policy with mortgage rates
shooting up very quickly and sitting around 5.7%. However, we do not think that this downturn in
housing will be anywhere near as severe as during the Global Financial Crisis. Not only are
household balance sheets much stronger and bank balance sheets more well-capitalized, but the
housing stock is much lower than in 2007 and 2008 (see figure 5). National home prices may decline
over the next year or so, but the low level of inventory may act to limit some of the downside.
Figure 5. U.S. Homeowner Vacancy Rate (%)
This line chart shows the percent of U.S. Homeowner Vacancy Rate from 1956 t0 2026.
Sources: Haver Analytics and Citi Global Wealth Investments as of June 2022.
Market
Indicators
Figure 6: U.S. Stock Market Returns and
Select Assets
Index
Weekly Chgchange in percent
YTDyear to date change in percent
12 Months12 month change in percent
Div. Yield division yield in percent
Dow Jones
-0.2%
-7.2%
-3.4%
2.0%
S&P 500
-1.2%
-11.3%
-4.0%
1.6%
NASDAQ
-2.6%
-18.8%
-12.6%
0.8%
Instrument
Weekly Chgchange
YTDyear to date
12 Months12 month change
Level
10-Year Treasury Yield (%)
14 bps
146.2 bps
172 bps
2.97%
Gold ($/Oz.)
-3.1%
-4.5%
-1.9%
$1,747.1
Oil ($/bbl)
-1.4%
17.9%
42.5%
$90.77
❮ Swipe left for more
This table shows returns for various USA equity markets and select assets, in weekly,
year-to-date and 12 month changes.
Figure 7: International Stock Market
Returns
Index
Weekly Chg change in percent
YTD year to date in percent
12 Months12 month change in percent
Div. Yield division yield in percent
Global
-1.6%
-14.3%
-10.2%
2.2%
Europe
-2.6%
-19.9%
-18.3%
3.4%
Japan
-1.4%
-16.4%
-15.7%
2.4%
Emerging Markets
-1.5%
-16.9%
-16.4%
3.2%
❮ Swipe left for more
This table shows the US Stock Market Returns and Select Assets and International Stock
Market Returns.
Sources: Bloomberg and Citi U.S. Wealth Management as of August 19, 2022. Note 1 (Equities):
Global = MSCI All Country World Index (USD); Europe = MSCI Europe (USD); Japan = MSCI Japan
(USD); Emerging Markets = MSCI Emerging Markets (USD). The equity index returns shown here are
based in U.S. dollars. Returns for a non-U.S.-based investor can differ significantly depending
on the effects of foreign currency exchange. Note 2 (Instrument): Gold = U.S. dollars per Troy
ounce; Oil = West Texas Intermediate crude at Cushing, OK. Indices are unmanaged. An investor
cannot invest directly in an index. They are shown for illustrative purposes only and do not
represent the performance of any specific investment. Past performance is not indicative of
future returns. Real results may vary.
The
Week Ahead
Figure 8: U.S. The Week Ahead
Date
Time
Event
Period
Consensus
Prior
8/23
10:00
New Home Sales
JulJuly
575kthousand
590kthousand
8/23
10:00
New Home Sales MoMMonth over Month
JulJuly
-2.5%
-8.1%
8/24
8:30
Durable Goods Orders
Jul PJuly
0.8%
2.0%
8/26
8:30
Advance Goods Trade Balance
JulJuly
-98.5bbillion
-98.2bbillion
8/26
8:30
Personal Income
JulJuly
0.6%
0.6%
8/26
8:30
Personal Spending
JulJuly
0.4%
1.1%
8/26
8:30
PCEpersonal
consumption expenditures Deflator MoMMonth over
Month
JulJuly
0.0%
1.0%
8/26
8:30
PCEpersonal
consumption expenditures Deflator YoYyear on
year
JulJuly
6.4%
6.8%
8/26
8:30
PCEpersonal
consumption expenditures Core Deflator MoMMonth over
Month
JulJuly
0.2%
0.6%
8/26
8:30
PCEpersonal
consumption expenditures Core Deflator YoYyear on
year
JulJuly
4.7%
4.8%
8/26
8:30
Retail Inventories MoMMonth over Month
JulJuly
1.3%
2.0%
8/26
10:00
U of Mich.University of Michigan Sentiment
AugAugust F
55.4
55.1
This table lists a number of key economic events, analysis reports and forecasts from
influential institutions.
Sources: Bloomberg and Citi Global Wealth Investment as of August 19, 2022. All forecasts
are expressions of opinion and are subject to change without notice and are not intended to
be a guarantee of future. Note: “A” means actual reported figure.
Shawn Snyder
Head of Investment Strategy,
Citi Personal Wealth Management