Dollar Hits Parity with Euro
Last week, the exchange rate between the euro and the dollar hit parity for the first time in 20 years. The de-risking sentiment of the markets has global investors looking at the dollar and dollar assets. This year, the U.S. Dollar Index, which compares the dollar to a basket of other currencies, such as the euro and the yen, is up just shy of 20%. There are two main reasons for the dollar’s strength. The first has to do with central banks. The Federal Reserve has already raised interest rates by 1.5% this year, while the European Central Bank has not. The dollar is stronger than the Japanese yen because of diverging monetary policy—Japan’s central bank intends to keep its 10-year yield near zero. The second reason for the dollar’s strength is the relative strength of the U.S. economy versus others, especially in Europe. Because of the Russia-Ukraine war and Europe’s reliance on energy from Russia, the region faces a significant energy shortage and a possible recession while the U.S. economy is still running strong.
Earnings Season for Big Banks
Earnings season starts this week as several of the largest banks and financial services firms are expected to report earnings. JPMorgan Chase, Wells Fargo, Morgan Stanley, and BlackRock are some notable financial firms reporting second-quarter earnings. A decline in mortgage revenue is expected to affect earnings from banks. Non-financial firms such as PepsiCo., Delta Airlines, and ConAgra Brands also report earnings. On the economic front, attention will be paid to June’s Producer Price Index (PPI) being released on Wednesday and the Producer Price Index (PPI) on Thursday. Headline inflation is currently running at a 40-year high, and the expectation is that prices might have increased slightly in June. Core inflation which excludes food and energy prices, is expected to fall slightly.
First Weekly Gain in 4 Weeks
US equity markets recorded their first weekly gain in four weeks as the higher risk of a recession caused investors to scale back their expectations of an aggressive Federal Reserve. For the week, technology-heavy Nasdaq outperformed the broader market. Energy shares underperformed as crude oil prices fell, as high gas prices and a weakening economic outlook increased the prospects of a decrease in demand. The University of Michigan’s final reading of June consumer sentiment was revised to the lowest level in four decades. On the bright side, the sentiment report also showed that consumers’ expectations of future inflation were lower than the previous month’s report. The Federal Reserve Chair Jerome Powell testified before Congress last week, stating that inflation expectations remained anchored, which helped boost sentiment in the equity market.
US Equities in Bear Market
Global stocks suffered another weekly drop as the aggressive pace of stimulus withdrawal by major central banks caused investors to sell equities. US equities are now in a bear market, a decline of 20% or more. The Federal Reserve, Bank of England, and the Swiss National Bank all raised interest rates last week to tame surging inflation. With economic data coming in weaker, investors are increasingly concerned with higher risk of recession. The more aggressive stance by central banks adds to headwinds for both economic growth and equities. The Federal Reserve lifted rates by 0.75% on Wednesday, the biggest hike since 1994, according to The Financial Times. Technology stocks that are more sensitive to interest rates and cyclical plays underperformed for the week. Declines were not limited to equities as cryptocurrencies such as Bitcoin dropped by more than 30% for the week. Crude oil prices also took a leg lower, closing under $110 per barrel in anticipation of lower demand from a potential slowdown in global growth.
Food & Energy Drive INFLATION Higher
Food and energy prices continue to drive inflation higher. According to the AAA motor club, the average price of gasoline hit $5 a gallon for the first time in history over the weekend. According to The Financial Times, gasoline price has risen by more than two-thirds in the past year and has more than doubled since Joe Biden entered office. Rising energy prices have fueled a large part of rising inflation, which accelerated once again in May. The latest consumer price index (CPI) released on Friday showed prices rising 1% in May and 8.6% over the past year. The report showed that food, energy, and shelter prices led to higher inflation. Food prices have risen by 10.1% and energy prices by 34.6% over the last 12 months, according to the US Bureau of Labor Statistics. Core CPI, which excludes food and energy prices, rose by 6% year over year. Persistent evidence of inflation raised fears for investors that the Federal Reserve will be more aggressive in raising rates to slow down economic growth.
US Equities Drop After Strong Jobs Report
US equities dropped last week following a stronger than expected May jobs report. The equity market has now declined in eight of the past nine weeks. The US labor market remains strong as the Department of Labor reported strong hiring for May. Although the
payroll data came in lower than the previous month, job growth was stronger than expected. The strong jobs data was negative for the markets as investors anticipate that the Fed will be inclined to be aggressive in raising interest rates. The Fed has already lifted the central bank’s main rate by 0.75 percentage points this year and is expected to follow up with further aggressive tightening. An excessively strong jobs market is inflationary, and the Fed is keen to slow job growth.
Equities to Bear Market Territory
Equities fell into bear market territory, more than 20% off its most recent high on Friday, before recovering before the close. Equity markets recorded another week of negative returns, with the S&P 500 and the Nasdaq losing streak reaching eight consecutive weeks. Continuing worries over economic growth and inflation sent investors away from the equities market. Disappointing earnings from major retailers such as Walmart showed the negative effects of inflation on corporate earnings. Crude oil prices rose to $112 a barrel, and the average price of gasoline reached new record highs. The Conference Board’s Measure of CEO Confidence fell for the fourth straight quarter. The survey showed that CEOs expect inflation to normalize sometime in the future and expect the Fed’s interest rate hikes to cause a brief recession. Investors bought into safe haven assets, sending the 10-year US Treasury note yield lower to finish the week below 2.8%.
Bitcoin Trading at Half All-time High
Cryptocurrencies surged in price during the pandemic. The first cryptocurrency and the most popular, Bitcoin hit an all-time high of over $60,000 just last November. With a sell-off that has accelerated in recent weeks, Bitcoin is now trading at less than half of its all-time high. Cryptocurrencies have been caught up in the sell-off affecting broader markets. The fear that the Fed will need to be aggressive in raising rates to bring in inflation has caused risky assets to fall, including equities and cryptocurrencies. Advocates saw Bitcoin as an inflation hedge. As inflation soared, so would the price of Bitcoin. But there is little data to suggest that as Bitcoin was only created over a decade ago. The outlook for cryptocurrencies will continue to be tied to broader market sentiment. Dramatic falls in the prices of cryptocurrencies might also alarm policymakers, leading to more regulation
Daryl Seaton, president of Sowell Management
Non-farm Payrolls Exceed Forecasts
The US labor market shows strength as non-farm payrolls grew more than 400,000 in April, exceeding forecasts. The unemployment rate stayed at 3.6%, close to the level before the pandemic began. Job growth was widespread, with the leisure and hospitality sector recording a large portion of the gain. Manufacturing, retail, and transportation sectors also added jobs. Job creation has been running very strong over the past year, and the unemployment rate has fallen more rapidly than economists expected. Employers’ struggle to fill positions has caused wages to rise. Although positive for the consumer, wage gains are negative for the inflation outlook and the Fed. Average hourly earnings in April climbed at an annual rate of 5.5%.